IN THE UNITED STATES BANKRUPTCY COURT FOR THE …omnimgt.com/cmsvol2/pub_46622/436395_1088.pdf ·...

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EAST\61437373.1

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

In re: REVSTONE INDUSTRIES, LLC, et al.,1 Debtors.

Chapter 11 Case No. 12-13262 (BLS) (Jointly Administered) Objection Deadline: October 9, 2013 at 4:00 p.m. Hearing Date: October 16, 2013 at 11:00 a.m. Related Docket No. 1053

OBJECTION OF BOSTON FINANCE GROUP, LLC TO

MOTION OF DEBTOR SPARA, LLC FOR ENTRY OF ORDER DIRECTING THE EXAMINATION OF BOSTON FINANCE GROUP, LLC RELATING

TO LEXINGTON LOGISTICS, LLC PURSUANT TO BANKRUPTCY RULE 2004

Boston Finance Group, LLC (“BFG”), by and through its undersigned counsel, hereby

files this objection (the “Objection”) to the Motion Of Debtor Spara, LLC (“Spara” or the

“Debtor”) For Entry Of Order Directing The Examination Of Boston Finance Group, LLC

Relating To Lexington Logistics Pursuant To Bankruptcy Rule 2004 (the “Rule 2004 Motion”).

In support of this Objection, BFG respectfully represents as follows:

PRELIMINARY STATEMENT

Spara’s attempt to use Rule 2004 of the Federal Rules of Bankruptcy Procedure (the

“Bankruptcy Rules”) to investigate potential breach of fiduciary duty claims that Spara might

have against BFG and those persons affiliated with BFG that served as officers of Lexington

Logistics, LLC f/k/a Spara Logistics, LLC, a Delaware limited liability company (“Lexington”)

during BFG’s “stewardship” of Lexington should be denied on numerous grounds, including,

among others, the simple fact that Spara, as debtor and debtor-in-possession and the managing 1 The Debtors in these Chapter 11 cases and the last four digits of the Debtors’ federal tax identification numbers are: Revstone Industries, LLC (7222); Spara, LLC (6613); Greenwood Forgings, LLC (9285); and US Tool and Engineering, LLC (6450). The location of the Debtors’ headquarters and the service address for each of the Debtors is 2250 Thunderstick Dr., Suite 1203, Lexington, KY 40505.

Case 12-13262-BLS Doc 1088 Filed 10/09/13 Page 1 of 18

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member of Lexington, lacks standing to pursue such claims. Consequently, the Rule 2004

Motion should be denied as an improper attempt to secure pre-litigation discovery by an entity

who has no standing to pursue alleged claims and an inappropriate use of the Revstone Debtor’s

and/or Spara Debtor’s scarce assets to impose significant costs on BFG, costs for which BFG is

indemnified by both the Debtor, Spara, as well as the non-debtor, Lexington.2

JURISDICTION AND VENUE

1. This Court has jurisdiction to consider this Objection and this contested matter

under 28 U.S.C. §§ 157 and 1334. This contested matter is a core proceedings under 28 U.S.C. §

157(b)(2). Venue of these cases and this Objection in this district is proper under 28 U.S.C. §§

1408 and 1409.

LIMITED BACKGROUND3

A. The Chapter 11 Case

2. On December 3, 2012, Revstone Industries, LLC (“Revstone”) and Spara each

filed voluntary petitions for relief under Chapter 11 of title 11 of the United States Code (the

“Bankruptcy Code”). On January 7, 2013, Greenwood Forgings, LLC (“Greenwood”) and US

Tool & Engineering, LLC (“US Tool” and together with Revstone, Spara, and Greenwood, the

“Debtors”) each filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code.

3. On December 18, 2012, the United States Trustee appointed an Official

Committee of Unsecured Creditors in the case of Revstone. No official committee has been

appointed in the cases of Spara, Greenwood or US Tool. No trustee or examiner has been

appointed in any of the Debtors’ cases.

2 BFG reserves all rights to seek indemnification and advancement of fees and costs for this and Spara’s prior attempt to pursue discovery from Lexington in this Court and the Delaware Court of Chancery. 3 BFG asserts that most of the factual allegations set forth by Spara in the Rule 2004 Motion are incorrect. Nevertheless, because BFG submits that the Rule 2004 Motion should be denied based on legal principles, BFG hereby only sets forth limited relevant facts.


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4. On February 4, 2013, BFG filed its Motion For Modification Of The Automatic

Stay And For Adequate Protection [Related Case No. 12-13263, Docket No. 33] (the “Spara

Stay Motion”) to, among other things, exercise its rights and remedies with respect to the

Lexington Membership Interest Collateral (as defined below). The Spara Stay Motion was

withdrawn, without prejudice, on March 13, 2013 [Docket No. 369].

5. On February 6, 2013, the Court entered an order permitting the Debtors’ cases to

be jointly administered solely for procedural purposes.

6. On March 12, 2013, Spara filed its Expedited Motion of Debtor Spara, LLC for

Entry of Order Directing Examination of Sandeep Gupta, John Fernando and Boston Finance

Group, LLC Pursuant to Bankruptcy Rule 2004 [Docket No. 356] (the “March 2004 Motion”).

7. On March 18, 2013, BFG objected to the March 2004 Motion [Docket No. 399]

(the “March 2004 Motion Objection”).

8. On March 20, 2013, the Court entered its Consent Order Directing Examination

of Sandeep Gupta and Lexington Logistics, LLC Pursuant to Bankruptcy Rule 2004 [Docket No.

411].

9. On April 17, 2013, Spara filed its Emergency Motion Of Debtor Spara, LLC For

Further Hearing On Debtor Spara, LLC’s Expedited Motion for Entry of Order Directing

Examination of Sandeep Gupta, John Fernando and Boston Finance Group, LLC Pursuant to

Bankruptcy Rule 2004 And The Entry Of An Order Directing The Examination Of A

Representative Of Lexington Logistics, LLC And Boston Finance Group, LLC Pursuant To

Federal Rule Of Civil Procedure 30(b)(6) [Docket No. 500], which was withdrawn that same day

[Docket No. 502].


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B. Spara’s Indebtedness to BFG and Default

10. On June 21, 2011, Spara entered into a loan agreement for financing from BFG in

the principal amount of $6,000,000 (the “Spara Loan”) under the terms of a Promissory Note

(the “Spara Promissory Note”).

11. In connection with and to secure the obligations owing under the Spara Loan,

Spara executed in favor of, and delivered to, BFG that certain Pledge Agreement for LLC

Membership Interest, dated as of June 21, 2011, by and among, Spara, BFG, and Lexington (the

“Spara Pledge Agreement”), in which Spara pledged 100% of the membership interests (the

“Lexington Membership Interest Collateral”) in Lexington. Spara delivered to BFG the

certificate representing Spara’s membership interest in Lexington (the “Lexington Membership

Interest Certificate”). BFG possesses the Lexington Membership Interest Certificate, thus BFG

holds a properly perfected security interest in the Lexington Membership Interest Collateral. A

true and correct copy of the Spara Pledge Agreement is attached hereto as Exhibit A and a true

and correct copy of the Lexington Membership Interest Certificate is attached hereto as Exhibit

B.

12. Spara failed to pay in full the interest payments due on December 1, 2011 and

January 1, 2012, and was, as of those dates, in default on the Spara Promissory Note.

Accordingly, on January 10, 2012, BFG filed a complaint in the Circuit Court for the County of

Grand Traverse, Michigan against Revstone, Spara, and certain of their affiliates seeking to

enforce its remedies under various loan documents, including the Spara Loan. On April 9, 2012,

the Circuit Court for the County of Grand Traverse, Michigan, entered a final judgment, among

other things, declaring the Debtors jointly and severally liable to BFG in the liquidated amount

of $6,708,500.00 plus costs on account of the Spara Loan and related loan documents (the


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“Michigan Judgment”). Interest and additional costs of enforcement have accrued and continue

to accrue.

13. The Spara Pledge Agreement afforded BFG certain remedies upon a default. As a

result of Spara’s defaults and entry of the Michigan Judgment, by letter dated November 6, 2012,

BFG exercised its voting rights under the Lexington Membership Interest Collateral by

becoming the manager of Lexington, and appointing Leo J. Govoni as the chairman, and John

Fernando, Jonathan Golden, Howard Harris,4 and Anthony Janicki as the officers, of Lexington.

Notwithstanding BFG appointing certain new officers and assuming the role of manager of

Lexington, BFG kept management of the day-to-day operations at Lexington largely unchanged

and at all times Lexington remained a non-Debtor affiliate of Spara.

14. On November 17, 2012, with the consent of Fifth Third Bank, Lexington’s senior

secured creditor, Lexington executed a Promissory Note in favor of BFG in the original principal

amount of $750,000 (the “Second Lien Loan”). In order to secure Lexington’s obligations

under the Second Lien Loan, Lexington granted to BFG a security interest in and lien on all of its

assets pursuant to that certain Security Agreement, dated November 17, 2012, by and between

BFG and Lexington.

15. On February 27, 2013, as part of an agreement between BFG and Fifth Third

Bank, Novo Turnaround Advisory Group, Inc. (“Novo”) was retained by Lexington to provide

financial advisory and consulting services to Lexington. On that same date, Lexington appointed

Sandeep Gupta, the principal of Novo, as chief restructuring officer and Michael Ceming as

president. In connection therewith, Mr. Govoni resigned as chairman and Messrs. Fernando,

Golden, Harris, and Janicki resigned from their positions as officers of Lexington.

4 Howard Harris is no longer employed by BFG.


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16. On April 18, 2013, Fifth Third filed a complaint in Wisconsin Circuit Court,

Columbia County, Case No. 13-CV-148, seeking to place Lexington in receivership. This action

was taken by Fifth Third without knowledge to BFG. To date, no receiver has been appointed.

OBJECTION

I. SPARA HAS NOT DEMONSTRATED A PROPER GROUNDS FOR A BANKRUPTCY RULE 2004 EXAMINATION

A. The Applicable Standard For Granting A Rule 2004 Motion.

17. Bankruptcy Rule 2004 entitles a party to examine the “acts, conduct, or property

or the liabilities and financial condition of the debtor” or “any matter which might affect the

administration of the debtor’s estate.” Fed. R. Bankr. P. 2004 (emphasis added). Thus, the

proponent of a Bankruptcy Rule 2004 examination bears the burden to establish “good cause” for

the requested discovery and some reasonable basis for the requested examination that relates to

matters contemplated under that rule. See In re Countrywide Home Loans, Inc., 384 B.R. 373,

393 (Bankr. W.D. Pa. 2008) (requiring the proponent to “meet a threshold standard of ‘good

cause’ before she will be permitted to conduct examinations and require the production of

documents pursuant to Rule 2004.”) (emphasis in original); 2435 Plainfield Ave., Inc. v. Twp. of

Scotch Plains (In re 2435 Plainfield Ave., Inc.), 223 B.R. 440, 455 (Bankr. D.N.J. 1998)

(granting a motion to quash Rule 2004 subpoena because, among other things, “the debtor cannot

meet his burden of demonstrating good cause for the Rule 2004 examinations at this juncture”).

To establish whether “good cause” exists, a court must consider the totality of the circumstances,

taking into account all relevant factors. Bank of Am. v. Landis, No. 2:11-cv-1338-RCJ-PAL,

2011 WL 6104495, at *5 (D. Nev. Dec. 7, 2011); see also In re Countrywide, 384 B.R. at 393

(“Inquiries that seek far-reaching information on policies and procedures of general application


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in the creditor's operation will require a correspondingly higher showing of good cause because

they are inherently more intrusive and present a greater potential for abuse.”).

18. Accordingly, although the scope of a Bankruptcy Rule 2004 examination may be

broad, it is not without limits, and must relate to the assets or financial affairs of the debtor.

2435 Plainfield Ave., 223 B.R. at 456 (explaining that a Bankruptcy Rule 2004 examination is “a

broad investigation into the financial affairs of the debtor for the purpose of the discovery of

assets of the estate and the exposure of fraudulent conduct”). And critically, a Bankruptcy Rule

2004 examination may not be used for the purpose of abuse or harassment. In re Washington

Mut. Inc., 408 B.R. 45, 50 (Bankr. D. Del. 2009) (noting that there are limits to the use of a

Bankruptcy Rule 2004 examination). As demonstrated below, Spara has not, and cannot satisfy

the statutory predicates upon which this Court must rest the granting of the Rule 2004 Motion.

Moreover, as is evident from Spara’s conduct, the Rule 2004 Motion is nothing but a thinly

veiled attempt to harass BFG by imposing on it unnecessary legal costs that Spara and Lexington

must reimburse, but lack assets to do so.

B. Spara Cannot Satisfy The Statutory Predicate For The Requested 2004 Examination.

19. Spara has not established and cannot establish good cause for a Bankruptcy Rule

2004 examination. Indeed, as demonstrated below, the Rule 2004 Motion seeks nothing more

than pre-filing discovery that is well beyond the permissible statutory scope of Bankruptcy Rule

2004.

20. As emphasized above, the permissible statutory scope of a Rule 2004 examination

is the investigation of the debtor’s assets, liabilities or property or something that is related to the

administration of the debtor’s estate. See Bankruptcy Rule 2004. The alleged basis upon which

the Debtor Spara is requesting the Rule 2004 examination, however, is the need to investigate


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alleged breaches of fiduciary duty to Lexington and to itself. See Rule 2004 Motion at ¶¶ 18, 19,

21. As demonstrated above, however, Spara does not, as a matter of law, have any such claim

against BFG. Consequently, there is no basis to authorize Spara to pursue a Bankruptcy Rule

2004 examination because Spara has no assets, liability or property that is the proper subject of a

Bankruptcy Rule 2004 examination and such an examination is also not necessary for the

administration of the Spara estate.

21. Specifically, Spara is the managing member of Lexington. A “member [of a

Delaware LLC] has no interest in specific assets owned by the LLC.” Poore v. Fox Hollow

Enters., No. C.A. 93A–09–005, 1994 WL 150872, at *2 (Del. Super. Ct. Mar. 29, 1994); see also

6 Del. C. § 18–701 (“A limited liability company interest is personal property. A member has no

interest in specific limited liability company property.”); Burtch v. Opus, L.L.C. (In re Opus

East, L.L.C.), 480 B.R. 561, 575 (Bankr. D. Del. 2012) (“As sole member of [a wholly-owned

subsidiary of the debtor], the Debtor does not have any interest in [the subsidiary’s] property

including any cause of action alleging that [the subsidiary] suffered an injury.”). Accordingly,

even assuming that Lexington had a valid causes of action against BFG for the purported

breaches of fiduciary duty, which it does not, such causes of action are property of Lexington, a

non-debtor. They are not assets of Spara, the managing member of Lexington.

22. Indeed, it is exactly for this reason that Spara has no direct action against BFG

that it is entitled to investigate. Specifically, for Spara to maintain a direct lawsuit as a member

of Lexington, the injury alleged must affect Spara alone or affect Spara’s right such as

“preemptive rights as a stockholder, rights involving control of the LLC, or a wrong affecting the

stockholders and not the [LLC].” VGS, Inc. v. Castiel, No. C.A. 17995, 2003 WL 723285 (Del.

Ch. Mar. 10, 2003) (quoting In re Paxson Commc’n Corp. S’holders Litig., Civ. A. 17568, 2001


EAST\61437373. 1 9

WL 812028, at *3 (Del. Ch. July 12, 2001)). In that regard, Spara is precluded from asserting

that it has suffered damages independent of any damage suffered by Lexington. See Kuroda v.

SPJS Holdings, 971 A. 2d at 887 (“Delaware law is clear that direct claims are available only

where the [LLC] member has suffered damage that is independent of any damage suffered by the

limited liability company.”). Spara has not alleged, and cannot allege, any particularized injury

upon which a Rule 2004 examination may be authorized. Consequently, Bankruptcy Rule 2004

cannot be used by Spara to justify a Bankruptcy Rule 2004 investigation into purported breaches

of fiduciary duties allegedly owed by BFG to Lexington, a non-debtor subsidiary.

23. Nor may Spara avoid this conclusion by arguing that BFG breached a fiduciary

duty that BFG owed to it. In particular, because a claim by Spara against BFG for breach of

fiduciary duty is not a direct claim, it is derivative in nature. As a member of a Delaware LLC,

Spara would have standing to bring a derivative action on behalf of Lexington only if Spara

proves that (i) it has made a demand on the managers or members of Lexington to bring such an

action and the managers or members of Lexington have “wrongfully” refused, or (ii) any demand

on the managers or members of Lexington would have been futile. See 6 Del. C. § 18-1001 (“A

member or an assignee of a limited liability company interest may bring an action in the Court of

Chancery in the right of a limited liability company to recover a judgment in its favor if

managers or members with authority to do so have refused to bring the action or if in an effort to

cause those managers or members to bring the action is not likely to succeed.”). Spara can show

neither.

24. Upon information and belief, Spara has not made a demand on Lexington’s

managers or members to bring a fiduciary duty action against BFG. Even if Spara had made

such a demand, however, Lexington’s managers or members would not refuse to bring such an


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action because Lexington is a wholly-owned subsidiary of Spara and the interests of the two

companies are aligned. See In re Opus East, L.L.C., 480 B.R. at 575 (Bankr. D. Del. 2012)

(finding that a trustee’s derivative action on behalf of a wholly-owned subsidiary of a debtor

failed to state a claim because the complaint did not describe a demand or why a demand would

have been futile). Moreover, Spara, as the managing member of Lexington, would never make a

demand upon itself or its appointed managers and then refuse its own demand. Indeed,

Lexington’s management was put in place by Spara and is controlled by Spara by virtue of the

Debtors’ corporate structure. Accordingly, Lexington’s managers or members would not refuse

to bring a derivative action if Spara demanded that they do so.

25. Additionally, Spara will not be able to prove that any demand on Lexington’s

managers or members to bring an action against BFG would have been futile. See Kahn v.

Portnoy, No. 3515-CC, 2008 WL 5197164, at *9 (Del. Ch. Dec. 11, 2008) (“[I]n order to

establish demand futility, the allegations in the complaint must allege particularized facts that

establish a reasonable doubt that ‘(1) the directors are disinterested and independent [or] (2) the

challenged transaction was otherwise the product of a valid exercise of business judgment.’”)

(quoting Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984)). First, none of the BFG-appointed

directors and officers are still managers at Lexington. Moreover, none of the “mismanagement”

is alleged to have been committed by Lexington’s current managers or members. In that regard,

Lexington’s managers and members are disinterested and independent such that demand would

not be futile. Consequently, because Spara cannot meet the statutory requirement to bring a

derivative action on behalf of Lexington, the right to bring such an action belongs exclusively to

Lexington and is not an asset of Spara’s to investigate.


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26. In sum, because the purported purpose of Spara’s Rule 2004 Motion is to

investigate a cause of action that it has no standing to pursue as a matter of law and, thus, does

not constitute property or the Spara estate, the Rule 2004 Motion should be denied.5

C. Spara Cannot Establish “Good Cause” To Conduct A Rule 2004 Examination.

27. Even assuming, arguendo, that the Court determined that there was some basis for

Spara to conduct an investigation, the Court should still deny the Rule 2004 Motion.

Specifically, as set forth above, to determine whether “good cause” exists, this Court must

consider the totality of the circumstances, taking into account all relevant factors. Bank of Am.

v. Landis, 2011 WL 6104495, at *5; see also In re Countrywide, 384 B.R. at 393 (“Inquiries that

seek far-reaching information on policies and procedures of general application in the creditor's

operation will require a correspondingly higher showing of good cause because they are

inherently more intrusive and present a greater potential for abuse.”). As set forth below, these

factors weigh heavily against authorizing Spara to conduct the Rule 2004 examination.

1. The Rule 2004 Motion Violates The Agreement Between Spara and BFG With Respect To Related Discovery Requests.

28. Based on discussions between counsel for BFG and Spara in connection with the

discovery requests propounded prior to filing the March 2004 Motion, BFG agreed to withdraw

the Spara Stay Motion. See Docket No. 369. In exchange, on March 11, 2013, counsel to Spara

agreed “that all pending discovery requests shall be deemed withdrawn” but reserved its right “to

seek similar discovery in different contexts.” See March 2004 Motion Objection, Ex. 4

(emphasis added). BFG submits that the document requests attached to the Rule 2004 Motion

5 As set forth above, the requested 2004 examination does not involve an asset of the Spara estate. Indeed, the requested examination does not relate to any legal or equitable interest that Spara presently has and consequently, does not involve any property of the Spara estate. See 11 U.S.C. § 541. Therefore, BFG maintains that this Court may well lack the jurisdiction to enter an order authorizing Spara to conduct a Rule 2004 examination as to the alleged breach of fiduciary duty claims. See 28 U.S.C. § 1334.


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are in the same “context” as the discovery requests propounded prior to filing the March 2004

Motion, and therefore Spara violated the agreement by filing the Rule 2004 Motion.

2. An Action For Breach Of Fiduciary Duty Against BFG Or Its Officers Is A Waste Of Estate Resources. a. Spara Is Barred From Bringing An Action Against BFG For

Breach Of Fiduciary Duties. 29. Spara asserts that BFG may have breached fiduciary duties to both Spara and

Lexington, including the duties of loyalty, honesty, due care, and good faith and fair dealing.

Not only are these assertions of mismanagement unfounded, but Spara has waived its right to

bring any action with respect to such allegations.

30. Specifically, section 19 of the Spara Pledge Agreement, “Limitation of Liability,”

states as follows:

No claim may be made by [Spara] or any other person or entity against [BFG] or its officers, managers, members, shareholders, directors, employees, affiliates, attorneys, representatives, or agents of any of them for any special, indirect, punitive, exemplary, or consequential damages in respect of any claim for breach of contract or any other theory of liability (other than gross negligence or willful misconduct) arising out of or related to the transactions contemplated by [the Spara Pledge] Agreement, or any act, omission or event occurring in connection therewith; and [Spara] waives, releases and agrees not to sue upon any such claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor.

Spara Pledge Agreement § 19 (emphasis added). Consequently, because Spara is barred from

bringing an action for breach of fiduciary duty against BFG or any of its directors or officers,

permitting a Bankruptcy Rule 2004 examination would be a waste of estate resources.

b. BFG Is Entitled To Indemnification From Both Spara And Lexington But Neither Has Sufficient Assets To Pay For Such Indemnification.

31. Spara is required to indemnify BFG for any claims against BFG arising under or

in connection with the Spara Pledge Agreement. See Spara Pledge Agreement, § 9.


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Specifically, section 9 of the Spara Pledge Agreement requires Spara to, among other things,

“[p]ay all out-of-pocket costs and expenses [of BFG] actually incurred in connection with the

administration of and in connection with the preservation of rights under and enforcement of” the

Spara Pledge Agreement and to indemnify and hold harmless BFG and its officers and directors

from “any and all costs, losses, liabilities, obligations, suits, penalties, judgments, claims,

damages, or expenses incurred by or asserted against” BFG “including, without limitation, any

investigation, litigation, or other proceeding related to the” Spara Pledge Agreement. Spara

Pledge Agreement, §§ 9.1; 9.3.

32. Moreover, pursuant to that certain Operating Agreement for Lexington, effective

as of June 11, 2011 (as amended, the “Lexington Operating Agreement”), BFG, as the former

manager of Lexington, is entitled to indemnification, including advancement of defense costs,

from Lexington for any claims and causes of action against it in connection with its former

management of Lexington. See Lexington Operating Agreement, § 9.1. Specifically, section 9.1

of the Lexington Operating Agreement states as follows:

[Lexington] shall, to the fullest extent authorized or permitted by the [Delaware Limited Liability Company] Act, (a) indemnify any person, and his or her heirs, personal representatives, executors, administrators and legal representatives, who was, is, or is threatened to be made, a party to any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person is or was a Manager, Member or officer of the Company or is or was serving at the request of the Company as a Manager, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (collectively, “Covered Matters”); and (b) pay or reimburse the reasonable expenses incurred by such person and his or her heirs, executors, administrators and legal representatives in connection with any Covered Matter in advance of final disposition of such Covered Matter. The Company may provide such other indemnification to officers, employees and agents by insurance, contract or otherwise as is permitted by law and authorized by the Members.

Lexington Operating Agreement, § 9.1.


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33. By pursuing baseless allegations against BFG, the Rule 2004 Motion serves only

to create a large potential indemnification claim against Lexington, therefore reducing the value

of Spara’s interest in Lexington. A reduction in the value of Spara’s interest in Lexington is

neither beneficial to its estate nor its creditors. Additionally, upon information and belief,

neither Spara nor Lexington have sufficient assets to pay for such indemnification. Indeed,

approval of the Rule 2004 Motion would likely lead to a decrease in the value of Spara’s estate

and therefore it should be denied as a waste of estate resources. Moreover, as noted above, Fifth

Third Bank has sought to place Lexington under receivership so Lexington also likely does not

have sufficient assets to indemnify BFG. Accordingly, the Rule 2004 Motion should be denied.

c. BFG Did Not Violate Its Duty of Care Under Section 9-207 of the Delaware UCC.

34. Spara’s assertion that BFG may have violated its duty of care to BFG as a

“lender-in-possession” is without merit. Pursuant to section 9-207 of the Delaware Uniform

Commercial Code (“UCC”), a secured party is required to use reasonable care in the custody and

preservation of collateral in such party’s possession. Del. Code Ann. tit. 6, § 9-207. Under

section 1-302 of the UCC, however, parties are free to determine applicable standards that are

not manifestly unreasonable. Id. § 1-302.

35. Here, as permitted by the UCC, Spara and BFG set forth the standards for

reasonable care of the Lexington Membership Interest Collateral in the Spara Pledge Agreement.

Specifically, section 11 of the Spara Pledge Agreement, “Reasonable Care,” states that “[BFG]

shall be deemed by [Spara] to have exercised reasonable care in the custody and preservation of

the Pledged Collateral in its possession if the Collateral is accorded treatment substantially equal

to that which [BFG] accords its own similar property.” Spara Pledge Agreement, § 11. BFG

exercised reasonable care in the custody and preservation of the Lexington Membership Interest


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Collateral by treating it in a manner substantially equal to that which BFG accords its own

similar property. Consequently, taking into account the totality of the circumstances, including

the baseless allegations of mismanagement asserted by Spara, the Rule 2004 Motion should be

denied as a waste of estate resources.

II. THE DOCUMENT REQUESTS ARE OVERBROAD AND UNDULY BURDENSOME

36. The discovery requests propounded in the Rule 2004 Motion impose an undue

burden and expense on BFG and the Rule 2004 Motion should be denied in its entirety.

37. First, Spara is not permitted to seek discovery that is unduly burdensome or that

relates to privileged or protected matters. In re Texaco, 79 B.R. at 553; In re Fin. Corp. of Am.,

119 B.R. 728, 733 (Bankr. C.D. Cal. 1990) (“[T]hose seeking to examine witnesses or records

pursuant to Rule 2004 are subject to applicable evidentiary privileges.”). Additionally, any

discovery may only be with respect to documents that are relevant or likely to lead to relevant

information with respect to its management of Lexington and such documents must be within

BFG’s possession, custody and control. In re Washington Mut. Inc., 408 B.R. at 50 (explaining

that the examination may not stray into matters which are not relevant to the basic inquiry).

Thus, to the extent that the Court issues an order granting the Rule 2004 Motion, BFG raises the

following specific objections:

REQUEST: All corporate governance documents of Lexington, including minute books and board presentations.

Objection: These documents are not within BFG’s possession, custody or control. This request is overly broad, unduly burdensome, vague, and ambiguous and purports to seek discovery of information that is neither relevant nor reasonably calculated to lead to the discovery of relevant information.

REQUEST : All documents received or prepared by BFG relating to Lexington.

Objection: This request is overly broad, unduly burdensome, vague, and ambiguous and purports to seek discovery of information that is


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neither relevant nor reasonably calculated to lead to the discovery of relevant information.

REQUEST: All documents relating to BFG’s exercise of its voting rights in

Lexington, including installing BFG as manager of Lexington, appointing certain new officers of Lexington, and exercising BFG’s option to purchase a ten percent (10%) interest in Lexington.

Objection: This request is overly broad, unduly burdensome, vague, and ambiguous and purports to seek discovery of information that is neither relevant nor reasonably calculated to lead to the discovery of relevant information.

REQUEST: All documents relating to BFG’s background and experience in manufacturing, the plastics industry generally, or the pallet and logistics industry specifically.


REQUEST: All minute books (directors’, members’, managers’ and shareholders’ meetings) of BFG relating to Lexington or its membership interests, together with the minutes of executive and other committees and any board or committee presentations.


REQUEST: All monthly, quarterly, annual and interim reports to shareholders, members or affiliates of BFG relating to Lexington or its membership interests.


REQUEST: All documents relating to actions taken by BFG and its representatives or designees during BFG’s stewardship of Lexington, including without limitation (a) management decisions affecting Lexington, (b) hiring and termination practices with respect to officers and employees of Lexington, including without limitation the terminations of Curtis Zamec and Rick Sasse and resignation of Hardy Johnson, (c) efforts to market Lexington’s assets, raise additional capital for Lexington, or restructure existing obligations of Lexington, and (d) communications with


EAST\61437373. 1 17

vendors, creditors, employees, and customers of Lexington, including communications with Sandeep Gupta and Fifth Third.

Objection: These documents are not within BFG’s possession, custody or control. This request is overly broad, unduly burdensome, vague, and ambiguous and purports to seek discovery of information that is neither relevant nor reasonably calculated to lead to the discovery of relevant information.

REQUEST: All documents relating to BFG’s relinquishment of management control of Lexington.


REQUEST : All communications relating to the documents requested in Requests 1 through 8 above.


REQUEST: All communications between BFG and Lexington.


REQUEST: All communications between BFG and Fifth Third relating to Lexington.


REQUEST: All communications between BFG and any other parties or representatives, or internally within BFG, not otherwise addressed above relating to Lexington, including the press and any blog or websites that have published information relating to Lexington.



EAST\61437373. 1 18

RESERVATION OF RIGHTS

38. BFG expressly reserves, and does not waive, its right to amend, modify or

supplement this Objection and to object to the Rule 2004 Motion and any and all discovery

requests of the Debtors on any grounds that governing law permits. BFG expressly preserves

and does not waive its right to assert the attorney-client privilege or any other privilege

recognized under governing law with respect to any discovery sought by any of the Debtors.

CONCLUSION

WHEREFORE, for the reasons stated in this Objection, BFG respectfully requests that

this Court deny the Rule 2004 Motion and grant such other and further relief as this Court deems

just and proper.

Dated: October 9, 2013 /s/Gregg M. Galardi Wilmington, Delaware Stuart M. Brown (DE 4050)

DLA PIPER LLP (US) 1201 North Market Street, Suite 2100 Wilmington, DE 19801 Telephone: (302) 468-5700 Facsimile: (302) 394-2341 Email: [email protected] -and- Gregg M. Galardi (DE 2991; NY 4535506) Sarah E. Castle (NY 4932240) DLA PIPER LLP (US) 1251 Avenue of the Americas New York, NY 10020-1104 Telephone: (212) 335-4500 Facsimile: (212) 335-4501 Email: [email protected] [email protected] Counsel to Boston Finance Group, LLC


Exhibit A

Case 12-13262-BLS Doc 1088-1 Filed 10/09/13 Page 1 of 12

Exhibit B


EAST\61345597.1

CERTIFICATE OF SERVICE

I, Gregg M. Galardi, hereby certify that on this 9th day of October, 2013, I caused a true

and correct copy of the Objection of Boston Finance Group, LLC to Motion of Debtor Spara,

LLC for Entry of Order Directing the Examination of Boston Finance Group, LLC Relating to

Lexington Logistics, LLC Pursuant to Bankruptcy Rule 2004 to be served in the manner

indicated upon the parties listed below:

Via Hand Delivery Laura Davis Jones, Esq. Pachulski Stang Ziehl & Jones LLP 919 N. Market Street, 17th Floor P.O. Box 8705 Wilmington, DE 19801 Via Hand Delivery Matthew P. Ward, Esq. Womble Carlyle Sandridge & Rice, LLP 222 Delaware Avenue, Ste. 1501 Wilmington, DE 19801

Via Hand Delivery Jane Leamy, Esq. United States Trustee 844 King Street, Room 2207 Lockbox #35 Wilmington, DE 19899-0035

/s/ Gregg M. Galardi

Gregg M. Galardi (DE 2991; NY 4535506)


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