UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION IN RE: COLLINS & AIKMAN CORPORATION, et al.

, Debtors. ) ) ) ) ) ) Chapter 11 Case No. 05-55927-R (Jointly Administered) Honorable Steven W. Rhodes

GENERAL ELECTRIC CAPITAL CORPORATIONS OBJECTION TO DEBTORS EX PARTE MOTION TO STRIKE PLEADING OF GENERAL ELECTRIC CAPITAL CORPORATION General Electric Capital Corporation (GECC), by and through its attorneys, hereby objects (this Objection) to the Debtors Ex Parte Motion to Strike Pleading of General Electric Capital Corporation (the Motion to Strike). In support hereof, and based on the Affidavit of Josef S. Athanas (the Athanas Affidavit) attached hereto as Exhibit A, GECC respectfully represents as follows: Background 1. On May 17, 2005 (the Petition Date), the Debtors commenced these cases by

filing voluntary petitions for reorganization under chapter 11 of the Bankruptcy Code. 2. Since that time, the Debtors have continued in possession of their property and

have operated and managed their businesses, as debtors in possession, pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. 3. This Court has jurisdiction over this matter pursuant to 28 U.S.C. 157 and

1334. This is a core proceeding pursuant to 28 U.S.C. 157(b)(2). The Debtors are in the business of supplying parts to automotive manufacturers. Procedural History

CH\853015.2

0W[;&%?

0555927060531000000000003

#q

4.

On April 18, 2006, GECC filed the Motion and Memorandum of Law of General

Electric Capital Corporation to Compel Payments First Due At Least 60 Days After the Petition Date Under Master Lease Agreements (the Motion)1, seeking that this Court order the Debtors to perform their obligations under the Becker Lease and the Products Leases arising after the first 60 days of these cases as and when due. 5. On or about May 5, 2006, the Debtors filed the Debtors Objection to Motion of

General Electric Capital Corporation to Compel Payments Under the Master Lease Agreements (the Debtors Objection) and the Committee filed a joinder thereto (the Committee Joinder and together with the Debtors Objection, the Objections). 6. On May 9, 2006, GECC filed General Electric Capital Corporations Omnibus

Reply to the Objections of the Debtors and the Creditors Committee to Motion and Memorandum of Law of General Electric Capital Corporation to Compel Payments First Due at Least 60 Days After the Petition Date Under Master Lease Agreements (the Reply). 7. On May 11, 2006, the Court held a hearing on the Motion (the Initial Hearing).

At the Initial Hearing, the Court established a procedure whereby the Debtors and GECC would each submit an offer of proof two weeks after the Initial Hearing. A week following receipt of the offers of proof, the Court would conduct an additional hearing (the Argument) at which the Court would decide, based on the offers of proof and oral argument, which party was more likely to show whether the Products Leases were true leases or secured financings. Objection 8. At the Initial Hearing, GECC respectfully objected to the Courts procedure as

unprecedented and violative of GECCs due process rights. GECCs position is that the Products
1

For the convenience of the Court, except as defined herein, capitalized terms used herein have the meanings assigned to such terms in the Motion.

2
CH\853015.2

Leases are presumed to be true leases and the Debtors should be required to satisfy their obligations under the Products Leases until the Debtors meet their burden to prove that the Products Leases are secured financings in the Products Adversary Proceeding. See In re Mirant, No. 03-46590, 2004 Bankr. LEXIS 1377, at *13 (Bankr. N.D. Tex. Sept. 15, 2004). 9. The procedure established by the Court requires the parties to provide evidence

and argument not as to the issues raised in the Motion, but as to the ultimate issue to be determined in the Products Adversary Proceedingwhether or not the Products Leases should be recharacterized as secured financings. 10. In good faith, GECC has addressed the ultimate issue in its brief and the exhibits

attached thereto. 11. At the Initial Hearing, Ms. Hijjawi asked leave of the Court to file a brief, I

would like the opportunity to brief the issues. See Transcript of May 11, 2006 Hearing (Hearing Transcript) p. 39, attached as Exhibit B. 12. The Committee also asked permission to file a pleading or join in the Debtors

pleading. See Hearing Transcript pp. 43-45. 13. On May 12, 2006, the day after the Initial Hearing, GECC informed the Debtors

that GECC intended to file a brief with its evidence. See Athanas Affidavit 2. The Debtors agreed that filing briefs with the evidence was appropriate, but requested that the parties seek approval of the Court to extend the time to file the briefs and evidence until May 30, 2006. GECC opposed the Debtors request that the parties seek Court approval for an extension of time. See Athanas Affidavit 3. 14. The Debtors had every opportunity to request an extension from the Court and

chose not to do so. In addition, the Debtors had every opportunity to file a brief and chose not to

3
CH\853015.2

do so. GECC should not be prejudiced by the Debtors failure to request an extension or file a brief as contemplated at the Initial Hearing. 15. Under the unusual circumstances of this Courts procedure, the Court has the

discretion to accept GECCs brief and exhibits. See U.S. v. Bell, No. CIV-F 95-5346, 2002 U.S. Dist. LEXIS 7487, at *23 (D.E.D. Ca. 2002)(stating that when no contrary rule applies, a federal court has discretion to accept late or irregularly filed documents.). Since all of GECCs arguments and evidence are included in the brief and exhibits thereto, it would be extremely prejudicial to GECC if the brief were stricken. 16. Moreover, the Debtors should not be granted an extension of time to file a brief

now, on the eve of trial, when they could have filed an extension request weeks ago but chose not to. For the foregoing reasons, GECC respectfully requests that the Court (i) deny the Debtors Motion to Strike and (ii) grant such other relief as the Court deems just and proper.

May 31, 2006

/s/ Erin L. Toomey__________________________ Judy A. ONeill (P32142) Erin L. Toomey (P67691) FOLEY & LARDNER LLP 500 Woodward Ave., Suite 2700 Detroit, Michigan 48226-3489 Telephone: (313) 234-7100 Facsimile: (313) 234-2800 -and-

4
CH\853015.2

David S. Heller Josef S. Athanas LATHAM & WATKINS LLP 233 South Wacker Drive Sears Tower, Suite 5800 Chicago, Illinois 60606 Telephone: (312) 876-7700 Facsimile: (312) 993-9767

ATTORNEYS FOR GENERAL ELECTRIC CAPITAL CORPORATION

5
CH\853015.2

Exhibit A Affidavit of Josef S. Athanas

CH\853015.2

Exhibit B Transcript of May 11, 2006 Hearing

CH\853015.2

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION In the matter of: COLLINS & AIKMAN CORP., Case No. 05-55927 Detroit, Michigan Thursday, May 11, 2006 Judge Rhodes /

Debtor

1) DEBTORS' MOTION TO EXTEND EXCLUSIVITY PERIOD; 2) DEBTORS' MOTION TO REJECT CERTAIN EXECUTORY CONTRACTS; 3) STATUS CONFERENCE ON COLLINS & AIKMAN V. NORTHERN TRUST BANK OF CALIFORNIA, N.A., ADVERSARY CASE NO. 06-4435; 4) GECC'S MOTION TO COMPEL PAYMENTS BEFORE THE HONORABLE STEVEN RHODES, BANKRUPTCY JUDGE TRANSCRIPT ORDERED BY: APPEARANCES: For the Debtor: Kirkland & Ellis BY: DAVID EATON BY: AMY HIJJAWI 200 E. Randolph Dr. Chicago, Il 60601-6636 Kirkland & Ellis BY: RICHARD CIERI 153 East 53rd St. New York, NY 10022 Carson Fischer BY: ROBERT WEISBERG 300 East Maple, 3rd fl. Birmingham, MI 48009 For the unsecured creditors committee: Akin, Gump, Strauss, Hauer & Feld BY: PHILLIP DUBLIN 590 Madison Ave. New York, NY 10022-2524 ADAM GORMAN (Kirkland & Ellis)

For GE Capital Corp.:

Latham & Watkins BY: JOSEF ATHANAS 233 S. Wacker Dr., Suite 5800 Chicago, IL 60606 Allard & Fish BY: DEBORAH FISH 535 Griswold, Suite 2600 Detroit, MI 48226 Musick, Peeler & Garrett BY: WESLEY AVERY One Wilshire Blvd., Suite 200 Los Angeles, CA 90017

For the Northern Trust in Adversary No. 06-4435:

For individual Defendants in Adversary No. 06-4435:

Jaffe, Raitt, Heuer & Weiss BY: LARRY ROCHKIND 27777 Franklin Road, Suite 2500 Southfield, MI 48034 John Boken, for the Debtor Robert Coast, for Lazard Joe Caterina, for GECC Kristel Szimanski 211 W. Fort Street, Suite 1800 Detroit, MI 48226 Lynn L. Simmons 8284 Caribou Trail Clarkston, MI 48348-4514 248-922-1587

Also present:

Recorded by:

Transcribed by:

TABLE OF CONTENTS PROCEEDINGS - Thursday, May 11, 2006 COLLOQUY RE: CONTINUED MATTERS 1-4 4 4

DEBTORS' MOTION TO EXTEND EXCLUSIVITY PERIOD Proffer by Mr. Cieri Ruling of the Court - granted DEBTORS' MOTION TO REJECT CERTAIN EXECUTORY CONTRACTS Proffer by Ms. Hijjawi Ruling of the Court - granted STATUS CONFERENCE ON COLLINS & AIKMAN V. NORTHERN TRUST BANK OF CALIFORNIA, N.A., ADVERSARY CASE NO. 06-4435 Scheduling of discovery and trial GECC'S MOTION TO COMPEL PAYMENTS Statement by Ms. Hijjawi Argument by Mr. Athanas for GECC Argument by Ms. Hijjawi Preliminary ruling of the Court Statement by Mr. Eaton Statement by Mr. Dublin Colloquy re: hearing 25 25 32 38 41 43 44 19 20 4 18

20 23

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Detroit, Michigan Thursday, May 11, 2006 Afternoon Session _ _ _ (At about 2:08 P.M. - Court in session on this matter.) THE CLERK: MR. CIERI: 05-55927, Collins & Aikman Corporation. Good afternoon, your Honor. Richard

Cieri of Kirkland & Ellis on behalf of the Debtors. Your Honor, if you have the agenda letter in front of you, items 1 through 4 are all continued. THE COURT: MR. CIERI: Yes. And that puts us, your Honor, to item

number 5, which is the Debtors' motion, your Honor, to extend the exclusivity periods. uncontested. Your Honor, that motion is

However, I am prepared today to proffer

testimony to the Court with -- in support of that -- that motion, and the purpose of the proffer, your Honor, is obviously to support the motion and also to apprise the Court and our stakeholders of the status of the case. THE COURT: MR. CIERI: Okay. Go ahead.

Thank you very much, your Honor.

As the Court knows, your Honor, we did file a motion to extend both the exclusive plan filing periods and exclusive solicitation periods. We have reached agreement with our

unsecured creditors committee and along with our bank lenders,

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

both the post-petition bank lenders and our pre-petition bank lenders, to extend that period for 75 days. Your Honor, I will not repeat much of what is in our motion or the evidence we've offered in support of exclusivity extensions in the past. I'll try to focus, your Honor, on new

current matters to bring to the -- to apprise the Court of what has taken place in the cases since the last time I appeared in front of you. We are pleased, your Honor, to report that our dual track process has been successful as evidenced by the receipt of a number of indications of interest either to sponsor a plan of reorganization through an equity infusion or to purchase substantially all the Debtors' assets. As those

interested parties, your Honor, are completing their due diligence process, the Debtors are proceeding with negotiations. And your Honor, we are continuing to

communicate with both of our committees with respect to those negotiations -- excuse me, with the creditors committee with respect to those negotiations and with our pre- and postpetition lenders. Your Honor, today's presentation will consist of two offers of proof, one from Mr. Robert Coast of Lazar and one from Mr. Boken. THE COURT: MR. CIERI: Okay. If I may, your Honor, with respect to

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Mr. Coast, who is in the courtroom. THE COURT: MR. CIERI: Okay. Go ahead.

Your Honor, Mr. Coast has not testified

previously in front of this Court, so just -- if I can just apprise the Court of his qualifications. THE COURT: MR. CIERI: Sure. He is a managing director at Lazard

Freres & Co., and they are the Debtors' investment bankers in these cases. experience. Mr. Coast has over 17 years of restructuring He is experienced in advising auto supplier He has also

restructuring such as Paragon and Sudberry, Inc.

been involved in many Chapter 11 cases, including WorldCom, Owens Corning and its five-and-a-half year trek through Bankruptcy Court, Budget Rent-A-Car, and American Pad and Paper. If called to testify, Mr. Coast would testify with respect to three subjects: the Debtors' progress to date with

respect to conducing an M&A process to identify parties interested in acquiring one or more of the Debtors' businesses; two, the Debtors' progress to date in developing a stand-alone plan of reorganization; and three, your Honor, the Debtors' progress to date in tracking financing for the company post-confirmation. If called to testify, Mr. Coast would testify that over the last four months Lazard has worked very closely with

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

the Debtors, the Debtors' other advisors and management to structure and implement a comprehensive M&A process as part of the dual track strategy, which is approaching, your Honor, its final stages. In particular Mr. Coast would testify that over

the last four months the Debtors' businesses have been marketed through a multi-stage process. The Debtors and their

advisors first prepared an offering book or information memorandum and then contacted 48 separate parties who might be interested in one or more of the Debtors' businesses: plastics, carpets and acoustics, convertible systems, and fabrics. And your Honor, he would testify that by the end of

March of '06 the Debtors received non-binding indications of interest from several parties ranging -- who were interested in purchasing one or more of those businesses or, your Honor, interested in purchasing the Debtors' entire -- the Debtors'

entire businesses, or in making an equity infusion into a reorganized debtor. After reviewing these indications of interest, Mr. Coast would testify the Debtor is determined to permit a certain number of the interested parties to begin -- to advance to the next stage of the M&A process, which involves comprehensive due diligence through management presentations, access to a data room and plant tours. He would testify, your

Honor, that those interested parties are now conducting further due diligence and that we expect the due diligence

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

efforts to continue for the next several weeks. Regarding the Debtors' progress toward developing a stand-alone plan of reorganization, Mr. Coast would testify that at the very same time Lazard was marketing the Debtors' businesses for sale, they've also been dealing -- involved in formulating a stand-alone plan of reorganization, and that stand-alone plan of reorganization, he would explain to the Court, would be -- would be accomplished in one or two ways: one, through a sale of the Debtors' business, or two, a party making an equity infusion in a -- into the reorganized debtor. Your Honor, he would explain that the Debtors have provided parties with detailed term sheet templates and have conducted extensive negotiations with such parties, and that those negotiations, your Honor, have included our unsecured creditors committee and our post- and pre-petition bank lenders. He would also say that we expect to receive a final term sheet for our proposed stand-alone plan of reorganization involving an equity infusion very shortly, and that once, your Honor, we receive that plan of reorganization term sheet in it's finalized with our various creditor constituencies, that we intend then to move forward to negotiate a purchase commitment. Your Honor, as a result of these activities we hope will take place in the very near term, the Debtors then would

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

be filing various pleadings with this court to obtain approval of the purchase commitment, and assuming the Court would approve the Debtors' pleadings, your Honor, the potential purchasers would then move to more extensive due diligence and the Debtors would then, your Honor, after the due diligence is completed, attempt to try to select the final and best bid for financing a plan of reorganization. Your Honor, Mr. Coast would be very clear with the Court that in -- in conducting those negotiations in the future we expect to involve all of our major creditor constituencies. Finally, your Honor, with respect to the Debtors' efforts to obtain exit financing -- and this is the financing that would finance the company on emergence from Chapter 11 -Mr. Coast would -- would testify that the Debtors have made extensive efforts to obtain that financing from 31 financial institutions, and that those efforts have resulted in 12 proposals received to finance Collins & Aikman on a reorganized basis as it emerged from Chapter 11. That, your Honor, would be the substance of Mr. Coast's testimony. If the Court -- Mr. Coast is available,

your Honor, in -- in case the Court or any other party might have some questions. MR. DUBLIN: Good afternoon, your Honor. Phil

Dublin of Akin, Gump on behalf of the committee.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

We have no questions for Mr. Coast today, but we would like to reserve our right to cross him on the topics for which he's been proffered on other matters that may arise in the future in the cases. hear repeat testimony. THE COURT: MR. CIERI: Thank you, sir. Thank you, your Honor. I know the Court does not like to

I also noted, your Honor, that we would offer the testimony of Mr. Boken. THE COURT: MR. CIERI: Go ahead. You have obviously -- know of Mr.

Boken's qualifications and he has testified here many times in the past. I might note, your Honor, that we were hopeful Mr. Macher could be here with us today, but they're holding some employee town meetings, so it wasn't possible for Mr. Macher to also join us. Your Honor, Mr. Boken, if called to testify, would testify of four -- in four areas. The first would be the

Debtors' operational initiatives, the Debtors' liquidity and cash flow, the Debtors' progress in their claims reconciliation process, and your Honor, his views as to what are the reorganization tasks that need to be completed in order to move these cases to emergence. With respect, your Honor, to the question of

10

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

operational initiatives, if called to testify, Mr. Boken would testify that the Debtors, led by Mr. Macher, as the company's chief executive officer and president, have developed and have implemented a comprehensive and sustainable business plan that optimizes the strategic benefit of each automobile part the Debtors produce and enhances the profitability of all of the Debtors' operations. Your Honor, this -- Mr. Boken would tell the Court that this revised business plan was finalized in February, and in his opinion provides the Debtors with an opportunity to effectively reorganize and preserve and maximize value for the benefit of the stakeholders. He would -- he would tell the

Court there are very -- there are several highlights with respect to the business plan; for example, seeking new business awards at competitive contribution margins. He would

tell the Court how the business plan focuses upon efforts to repair customer relationships, increasing revenue streams with Asian customers, and implementing a service parts supply business. He would also explain to the Court how the business plan is focused on improving the cost for raw materials and purchased products that the Debtors currently utilize. He

would also describe for the Court how the Debtors are moving to reduce their actual production costs by implementing different manufacturing practices, recycling programs, and

11

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

other various cost reduction initiatives across the company. Your Honor, with respect to the implementation of cost reduction measures, the Court has previously heard testimony regarding the uncompetitive position the Debtors find themselves in in a variety of areas. However, Mr. Boken

would testify that the Debtors have -- are addressing those issues and he would explain, your Honor, in some detail how the Debtors are planning to reduce manufacturing costs by approximately $50-to-$60 million annually by taking such steps as in-sourcing and out-sourcing various programs, reducing or recycling scrap materials, and utilizing alternative production techniques that Mr. -- Mr. Macher has introduced since he joined C&A. He would also explain to the Court, your Honor, that the business plan contemplates a savings of $20-to-$25 million annually for the next five years since the Debtors have now identified opportunities to obtain certain key materials from less expensive qualified alternative suppliers or by purchasing scrap, your Honor, and -- and regrinding it into usable product. In addition, your Honor, he would -- he would explain to the Court that the business plan contemplates that by the end of 2006 the Debtors expect to save an aggregate amount of $40 million by rationalizing their production footprint. And as the Court already knows from the motions

12

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

we've filed with the Court, the Debtors have already closed five plants and have announced, your Honor, intents to consolidate operations at seven more plants. He would further explain how the Debtors intend to look at their business from top to bottom and that they believe that they can identify annual savings of approximately $15 million to $20 million over the next three years. Mr. Boken then, your Honor, would also testify regarding the element of the business plan that involves tracking new business, and I believe the Court would be -would be quite happy with this testimony. He would testify,

your Honor, that the Debtors have obtained awards -- have obtained major new awards since the customer negotiations were completed a few months ago. We have been -- he would testify

that Collins & Aikman has been -- has been awarded new -- new programs from DCX and from Toyota. In addition he would

testify that the Debtors are in active negotiations with one customer, a very major customer, whose identity must remain confidential at this time, regarding re-sourcing significant programs from other suppliers, and your Honor, that we expect within the next 30 days to make an announcement with respect to those -- those continuing negotiations to bring new business to Collins & Aikman. Your Honor, he would, however, caution the Court that there is one very major hurdle to obtaining new business,

13

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

and that is when you obtain new business, you have to fund the production costs, and that there are capital costs associated with obtaining this new business. However, your Honor, he

would -- he would testify that the Debtors are analyzing those capital requirements, and are attempting to evaluate every possible means for -- for tracking that new capital. Regarding the management team changes, your Honor, and as the Court may recall from beginning these cases almost a year ago, the Debtors' management team has changed quite significantly over the last 12 months. Mr. Boken would

testify that during this last exclusivity period the Debtors have made additional management changes in the areas of operations, commercial, engineering, accounting and finance. And your Honor, he would also explain that even at the production level the Debtors have continued to make management changes in the plants. Finally, your Honor, I would note that Mr. Boken -I would note, your Honor, that -- and this will be made public later in the day today if it hasn't been made already -- that there have been changes in our board of directors and the Hartland directors have now resigned. Your Honor, regarding the Debtors' current cash flow and revenue generation -- generation situation, Mr. Boken would testify that the customer -- renegotiated customer contracts that this Court approved have increased Collins &

14

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Aikman's revenue.

He would also tell you that these contracts

are proving to be a critical component of our ongoing liquidity and have allowed us to preserve if not strengthen our customer relationships. I, obviously, your Honor, will This Court is well

not repeat the terms of those contracts.

aware of the benefits those contracts brought to Collins & Aikman. However, your Honor, he would -- he would tell you -- he would conclude that the result of those contracts along with the operational -- operational changes that Mr. Macher has implemented have improved the Debtors' liquidity and cash flow. Two other areas Mr. Boken would speak to, your Honor, one is the status of the claims reconciliation process and the other would be what does he see as the challenges going forward. Your Honor, as a matter of background with

respect to the claims reconciliation process, the Court undoubtedly remembers that a bar date has been established in this case to file proofs of claim and that was January 11th of 2006. In response to that bar date, your Honor, the Debtors

mailed customized proofs of claim to 9000 scheduled creditors, and blank proofs of claim to an additional 110,000 creditors and notices of the bar date were published in various publications. Your Honor, in response to that bar date notice, the

15

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Debtors have received over 8000 proofs of claim.

That's in

addition, your Honor, to the over 9000 as scheduled proofs of claim. Mr. Boken, your Honor, now would testify that over the

last several months in his belief the Debtors have made significant progress in addressing these claims. He would

remind the Court, your Honor, of the -- of the Court's assistance in disallowing a total of 383 claims in the aggregate amount of over $4 billion to date. He would, your Honor, then summarize the -- the Debtors' efforts over the next coming weeks to summarize and estimate those claims in order to provide to our creditor constituencies estimates for purposes of plan formulation process. Final -- the final area Mr. Boken would touch on, your Honor, are what does he see as the critical next phases of those -- of these cases. He would -- he would testify,

your Honor, that there are basically 12 things that he sees need to be completed before we're able to emerge from Chapter 11. The first is, obviously, to finalize our negotiations

with a potential stalking horse or plan investor. The next thing, your Honor, would be after we had finalized those negotiations would be to come to this Court and file a motion for approval of a stalking horse or bid protection procedures, and if the Court was to grant that, we would thereafter move, your Honor, to solicit higher and

16

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

better offers than the stalking horse proposal. Your Honor, thereafter the parties would obviously -- would ask the Court to approve the stalking horse proposal as part of a plan of reorganization. We would conduct due

diligence with the stalking horse -- with the stalking horse purchaser or a higher and better purchaser. And your Honor,

we would then move to -- with Mr. Coast and Lazard's assistance to finalize defining for the reorganized company. As part of that process of emerging, your Honor, Mr. Boken would testify that obviously we need to finalize our relationships with our customers going forward, in particular cement these new expanded relationships we're so hopeful will -- will come about. He would also testify that obviously we

need to deal with the 8000 proofs of claim that have been filed against the company, with -- and those claims, your Honor, at the present time total $53 billion. He would -- he would -- he would also explain that it's necessary for the Debtors to move forward to resolving -coming to an acceptable resolution of their pension obligations, and that would involve dealing with the PBGC and the IRS. He would also say, your Honor, that obviously we

would have to resolve any issues that we have ongoing with the Securities and Exchange Commission. Obviously this Court is

aware of the ongoing criminal investigations and any sort of fallout from those investigations obviously would need to be

17

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

resolved as part of or prior to consummation of a plan. And finally, your Honor, Mr. Boken would -- would explain how we need to work with our -- in accomplishing these tasks we would need to work with our various creditor constituencies, obviously the unsecured creditors committee and our pre- and post-petition lenders. Your Honor, that would be the proffer of proof from Mr. Boken, and he is available today, obviously, if the Court or any other person has any questions, and we anticipate Mr. Dublin's concerns; obviously the committee reserves -- in the future reserves on any -- to ask any questions of Mr. Boken regarding these subjects. THE COURT: Thank you, sir.

Would anyone like to say anything about this matter? No response. All right. the motion is granted.

You may submit an order. MR. CIERI: Thank you very much, your Honor.

Your Honor, I'm going to turn the rest of the agenda over to -- to my colleagues, and if I may be excused. THE COURT: MR. CIERI: You may. Thank you, your Honor. Good afternoon, your Honor. Robert

MR. WEISBERG:

Weisberg appearing on behalf of the Debtors. Your Honor, I'd like to present to the Court today Amy Hijjawi, an attorney with Kirkland & Ellis, for admission

18

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

to the Eastern District. approach. THE COURT: MS. FISH: THE COURT: MS. FISH: Fish. Yes.

I do have her application if I might

Excuse me, your Honor. Yes? Good afternoon. Deborah Fish of Allard &

I have today Mr. Wes Avery from Musick, Peeler & I would like to present his card for admission. THE COURT: Okay. Is there anyone else who's

Garrett.

seeking admission to the bar of the court today? Ms. Hijjawi and Mr. Avery, are you prepared to take the oath of admission to the bar of the court? MS. HIJJAWI: MR. AVERY: THE COURT: Yes, your Honor. I am, your Honor. All right.

(At about 2:29 P.M. - Attorneys Hijjawi and Avery sworn.) THE COURT: cards for you. MS. HIJJAWI: MR. AVERY: THE COURT: MS. HIJJAWI: Thank you, your Honor. Thank you, your Honor. You're all set. Go ahead. Amy Okay. Welcome. We'll take care of your

Good morning (sic), your Honor.

Hijjawi on behalf of the Debtors. The next matter up, your Honor, is an uncontested motion to reject certain executory contracts. The Debtors

19

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

have identified these contracts as unnecessary to the ongoing business operations and -- and that these contracts present burdensome obligations to the Debtors. The rejected contracts

consist of seven contracts for forklift trucks with Toyota Motor Credit Corporation and Delage Aladdin Financial Services, Inc. that are being used at facilities that will be closing. There's no objection, your Honor, and we ask that

you grant the motion. THE COURT: Thank you. Would anyone like to say

anything about this matter? No response. an order. MS. HIJJAWI: Thank you, your Honor. The motion is granted. You may submit

There's another matter that is not on the agenda, your Honor, but we filed a status report in connection with the Collins & Aikman versus Northern Trust Bank matter, and I would just want to make sure that you got the report, your Honor, and just briefly report to you that the parties have agreed upon a discovery schedule. The Debtors are filing

their answer to the counterclaim filed by the beneficiaries today. We're also going to respond to the intervention by

Northern Trust with respect to -THE COURT: MS. HIJJAWI: THE COURT: Stand by just one second. Okay. What we'll do is go ahead and call the

20

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

adversary proceeding for the record. MS. HIJJAWI: THE COURT: THE CLERK: Okay. Jan, would you go ahead and do that. 06-4435, Collins & Aikman Corporation

versus Northern Trust Bank of California. MS. HIJJAWI: THE COURT: Thank you, your Honor. And let me just ask you to hold on one Okay. I have

more second while I get that document here. your Rule 26(f) conference report here. MS. HIJJAWI:

I don't know if you'd like me to take

a step back, your Honor, and give you an overview of the pleadings. THE COURT: Well, let's start with this. What is

the Plaintiff's claim? MS. HIJJAWI: THE COURT: MS. HIJJAWI: I'm sorry? What is the Plaintiff's claim? Actually it's an adversary filed by

the Debtors, your Honor, seeking turnover of assets that are in a certain RABI trust. In response to the complaint, your

Honor, the beneficiaries of the trust intervened and asserted a counterclaim against the Debtors for conversion, claiming that the trust has terminated and they are entitled to the assets within the trust. A RABI trust, by its definition,

your Honor, keeps the rest within the authority and ownership of the grantor, here the Debtors. So we think that this is

21

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

really a matter of law, can be resolved as a matter of law. The trust agreement itself clearly states that in the event that the trust is terminated, the rest reverts back to the Debtors. However, for purposes of keeping everything

efficient and moving quickly, we have had a Rule 26 conference. We've agreed to a discovery schedule. We will be

answering both the counterclaim of the beneficiaries in the intervention of the trustee, Northern Trust. Today we will

file our answer to the beneficiaries' counterclaim and tomorrow we will be filing our answer to the intervention. We also plan within the next couple of days to file a motion for judgment on the pleadings because we believe that the Court can resolve this issue as a matter of law. in the event that that motion does not dispose of the complaint, we have agreed to the discovery schedule as set forth here and which we provide for expert discovery, written discovery, fact discovery, and then filing of dispositive motions upon the conclusion of that discovery. THE COURT: MR. AVERY: Counsel? Wesley H. Avery and Deborah Fish However,

appearing on behalf of Northern Trust, interpleading party. We have nothing to add, your Honor. MR. ROCHKIND: May it please the Court, Larry

Rochkind, Jaffe, Raitt, Heuer & Weiss, appearing on behalf of individuals I will refer to as beneficiaries that are listed

22

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

in the pleadings.

I have nothing to add. Mr. Rochkind, I see a motion for summary

THE COURT:

judgment that your office filed; right? MR. ROCHKIND: THE COURT: Yes, your Honor, that's correct. And that was filed on April 26th.

Okay.

So I assume we'll get timely answers to that and set it for hearing in due course. MR. AVERY: We are going to respond to it. I

believe our response is due Monday, your Honor. already drafted an opposition. THE COURT: trial dates for this? Okay.

And we have

Jan, do you have pretrial and

(At about 2:35 P.M. - discussion off the record.) THE COURT: It looks like in case we do have to go

to trial, we need something probably in the September time frame. I'll tell you what, make it October. THE CLERK: Final pretrial conference October 10th

at 3:30; trial October 24th at 9:30. THE COURT: become necessary? MS. HIJJAWI: MR. AVERY: Yes, your Honor. Yes, your Honor. October 24th, your Honor, I'll be out Are those dates acceptable if they do

MR. ROCHKIND: of the country. THE COURT:

When will you be back?

23

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

MR. ROCHKIND:

I return on Sunday, October 29th, and

I would prefer not to be in trial on Monday, October 30th. THE COURT: THE CLERK: THE COURT: MS. HIJJAWI: MR. AVERY: Okay. We'll find another date then.

November 9th? Is that date acceptable? Yes, your Honor. Yes, your Honor. Yes, your Honor. Now, Collins & Aikman intends to

MR. ROCHKIND: THE COURT:

Okay.

file a motion for -- did you say judgment on the pleadings? MS. HIJJAWI: THE COURT: Yes, your Honor. Very shortly. Does it make sense to

have a hearing on that motion and Mr. Rochkind's motion? MS. HIJJAWI: The motion for summary judgment? I

would imagine, your Honor. MR. ROCHKIND: It's fine with me. I'm not sure how

related they are, but I see no problem in doing that. MR. AVERY: your Honor. THE COURT: All right. Jan, let's hold off on We have -- we have no objection to that,

setting Mr. Rochkind's motion for hearing until we get ready to set a hearing on this other motion; okay? Anything else on this adversary proceeding then? MR. ROCHKIND: MS. HIJJAWI: I have nothing further. No.

24

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

MR. AVERY: THE COURT: MS. HIJJAWI:

No, your Honor. Thank you.

Thank you.

Your Honor, the next matter that's up

is a motion to compel filed by GECC with respect to payments under certain agreements entitled Master Lease Agreements. The Debtor responded to the motion, taking a position that under 365, the Court must first find that the leases at issue are true leases before it can order performance under Section 365. The Debtors also filed a

complaint pretty much contemporaneously with the filing of the motion. The parties have been engaged in substantial

conversations over a period of time, and we're each expecting the other's pleadings. over to Mr. Athanas. THE COURT: MR. ATHANAS: Okay. Let's proceed on the motion. Joe So with that opening, I'll turn it

Good afternoon, your Honor.

Athanas on behalf of GECC. As your Honor's aware from the pleadings, the Debtors filed a complaint, as Ms. Hijjawi said, commencing an adversary proceeding seeking to recharacterize three leases between Collins & Aikman's Products Co. and GECC, which I'll refer to as the products leases, as secured financings. GECC's answer is not yet due in that -- in that litigation, and discovery has not yet commenced. Today I appear on behalf of GECC to compel the

25

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Debtors to pay their obligations under the products leases while the adversary proceeding is pending. In addition I appear on behalf of GECC to compel payment under another lease between the Becker Group and GECC, which the Debtors have not challenged. With respect to

amounts due under the Becker lease, the Debtors say in their objection that we can just work and reconcile those payments and they intend to pay, and we'll take them at their word, and we're happy to do that, your Honor. So that leaves for today the products leases. I have a witness, Joe Caterina (ph. sp.), from GECC who's here and available to testify as to the amounts due under the products leases, how payments in collections have been applied, and I'm happy to just -THE COURT: MR. ATHANAS: yes. Are any of those matters in dispute? Your Honor, they -- there were some -In their objection they

I guess the answer is yes.

disputed the amount of the taxes being due and they also disputed how some amounts were applied in terms of the letters of -- letter of credit for example, saying that, you know, it should be offset against all three leases when in fact it only secures one of the three leases. testimony. I'm happy to proffer his

I can go quickly if -- if that makes sense to you. Well, let's hold off on deciding how

THE COURT:

much to pay until we decide whether to pay.

26

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 answer. happen. Honor.

MR. ATHANAS:

That's certainly fine with us, your

In GECC's view, your Honor, this case is very similar to the Morant case in which a debtor was ordered to pay rent during a recharacterization adversary proceeding. Morant the court held, first -THE COURT: recharacterized? MR. ATHANAS: If the lease is recharacterized, what What happens if the lease is In

the Morant court said could happen was -THE COURT: MR. ATHANAS: I'm asking you what you say will happen. Well, your Honor, I think that's up to

your Honor, but I think there's a number of things that can happen. THE COURT: I'm asking you what you say should

MR. ATHANAS:

Well, one thing that could happen,

your Honor, is that we could -THE COURT: MR. ATHANAS: THE COURT: Sir -Yes. -- I'm asking you a question. I need an

MR. ATHANAS:

And -- and the answer, your Honor, is,

one, the -- the rent payments made could be applied to the principal amount due under the secured financing if your Honor

27

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

finds it secured financing. THE COURT: Okay. One more time. What's GECC's

position on what should happen? MR. ATHANAS: Your Honor, GECC's position is that

either it should be applied to principal, it should be applied -- as adequate protection payments, or if -- if your Honor deems it appropriate because our secured claim's insufficient, then it should be disgorged by GECC. And certainly we have

the financial wherewithal to disgorge it at any time in the future if that becomes required. THE COURT: So you're telling me that you don't have

a position on which one of those three is appropriate. MR. ATHANAS: Well -- well, your Honor, I think

obviously our first choice would be adequate protection payments, but I think, you know -- your Honor, I think what would be -THE COURT: question. MR. ATHANAS: No. Your Honor, I think the answer to Okay. So that's your answer to my

your question is that they should either be applied to principal or if our -- if our secured loan is found not to be sufficient, then they should be disgorged. We're not trying

to get anything extra out of this; we're just trying to protect ourselves. THE COURT: Okay.

28

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

MR. ATHANAS:

The Morant court held, first, a lease

is presumed to be a true lease until proven otherwise. Second, that the burden of proof to recharacterize a lease as a secured financing is on the debtors, and it's not meant by -- met by allegations, even if they're in a complaint. -THE COURT: What's your position about how much Third

money is at stake here? MR. ATHANAS: Your Honor, it -- it depends on how

long the litigation takes, but it's roughly -- works out to about $13 million per year. -THE COURT: MR. ATHANAS: So a little over a million a month. Yeah, a little over a million a month, So if the litigation takes a year

plus there's some that's due already -THE COURT: MR. ATHANAS: counting at this point. THE COURT: All right. Here's what I thought of: Okay. -- that's about $2.8 million and

Give each side an amount of time we can agree upon to present their case on why this lease should or should not be recharacterized as a kind of offer of proof; I decide which side is more likely to prevail, such decision not being binding or having any impact whatsoever in the adversary proceeding; and the decision whether your motion is granted

29

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

depends on that decision. MR. ATHANAS: THE COURT: MR. ATHANAS: Your Honor, I think -What's wrong with that? Well, your Honor, from our perspective One, the clock is ticking and And two,

there's two problems with that.

-- and a lot of rent for a lot of money is accruing. our second problem with it -THE COURT: good idea? MR. ATHANAS:

Why does that mean that this isn't a

Well, your Honor, because every day we

wait, there's only one party that takes risk and is punished, and it's GECC. And -- and you know -Why -- why is that? -- if your Honor were to say they

THE COURT: MR. ATHANAS:

should set aside rent during that period -THE COURT: MR. ATHANAS: Why is that? Why is that?

Because -- because, your Honor, rent

has come due under the leases and not been paid, and if the Debtors' case were to convert to Chapter 7 tomorrow or if the secured creditors were to foreclose tomorrow, we would never be paid. THE COURT: likely to happen? MR. ATHANAS: THE COURT: We do not know, your Honor. Do you have any reason to believe Do you have any reason to believe that's

30

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

there's any chance that will happen? MR. ATHANAS: THE COURT: MR. ATHANAS: We do not know, your Honor. What's your second best reason? My -- my second best reason, your

Honor, is there -- there are a lot of facts -- I mean we've already started our investigation, not surprisingly, and there are a lot of facts and a lot of third-party witnesses that are going to weigh in at the trial on -- on the underlying issue of whether these are true leases. For example, we have

appraisals taken at the time by a major accounting firm, and those appraisals are going to be a key piece of evidence. There are public filings where their own accountants say that these are operating leases. accountants. THE COURT: So you can tell me about those We'll need to depose those

appraisals in an offer of proof that won't take very long. And you can show me the appraisals. I guess what I'm talking

about is a kind of estimation, although that isn't the exact correct phraseology under the Code and the rules. MR. ATHANAS: You -- your Honor, it's -- it's an I understand what your You've heard our

unusual -- it's an unusual suggestion. Honor is -- is suggesting completely. objections to it.

We do object to it because we think we

might be denied due process because a lot of the facts that we intend to rely on require us to depose witnesses of theirs,

31

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

such as their own accountants, who treated these as operating leases in their publicly filed documents. THE COURT: How do you know you're going to rely on

them if you don't know what they're going to say? MR. ATHANAS: Well, your Honor, we expect to rely on

them based on the opinions they gave with respect to the Debtors' financial statements, but we won't know until we have the opportunity to depose them. THE COURT: MR. ATHANAS: THE COURT: Opinions given when? In 2001, 2002, 2003. But you have those already. So great,

just tell me about them. MR. ATHANAS: Certainly, your Honor, we can provide As long as it's not --

less than all the evidence. THE COURT: MR. ATHANAS:

I don't want all the evidence. We understand, your Honor. You know

what, your Honor, your suggestion is creative and it's -- it's well taken. We object to it formally, but we understand what

your Honor is saying. MS. HIJJAWI: Good afternoon, your Honor. We think

your idea is a great idea, but I think, your Honor, what you're really saying is that GECC is entitled to adequate protection while we all take the time to figure out whether this is really a true lease and whether therefore Section 365 applies.

32

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

I think it's curious that GECC didn't come in full blazes in its reply or in this courtroom saying, the Debtors say our equipment is only worth 21 million. it's worth 50 million. of value. No, your Honor,

They don't even mention their opinion

And the reason for that, your Honor, is because

GECC knows that the equipment is worth at best, at most, and only in the hands of the Debtor 21 million. THE COURT: MS. HIJJAWI: THE COURT: Did you infer from what I said -I'm sorry. I'm sorry. Did you infer from what I

said something about adequate protection? MS. HIJJAWI: Well, what I'm -- what I'm suggesting,

your Honor, is that an alternative to an expedited hearing, which we will take if we have no other choice, is that the Court require GECC to file a motion for adequate protection, because the -- the structure within the Code and in Section 365 provides that protection for GECC. Until it's established

that there's a true lease, 365 doesn't apply. GECC says, well, we're the only ones at risk, we're the only ones that are unprotected. THE COURT: Well, but isn't there a presumption that

these are true leases? MS. HIJJAWI: Your Honor, there may be a presumption

under state law, and I think the cases that GECC has cited, in particular Owens -- I'll get the name for you, your Honor --

33

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Owens Pillowtech, which is I think a Third Circuit case, that presumption is actually shifting. When you read the contents

of the UCC, you'll see that the presumption shifts based on what the court finds when it's considering the factors. And -- but that presumption, your Honor, is presumption created under state law, and it's created when the court turns from its federal analysis over whether 365 requires a true lease to its analysis of whether the agreement at issue is in fact a true lease. And -- and even within the

quotes that GECC has in its reply brief, there are words that are left out that don't make that very clear, but if you'd like the full quotes, I can read you -- for example, in PCH, your Honor, the court begins to discuss the burden of proof and the presumption in the context of its analysis having first determined that it must first find that the lease is a true lease before it can impose the obligations under 365 on the debtors, it then turns to state law analysis and begins discussing burdens of proof and presumption. And the quote,

your Honor, in the reply brief actually starts with while there is a strong presumption, a lease is not a lease just because it says it's a lease. And in fact, your Honor, I think the Seventh Circuit and the Ninth Circuit have both challenged this notion that the deference to state law with respect to determining these property rights is absolute. In fact what the Seventh Circuit

34

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

and the Ninth Circuit have both said is that to the extent there's a presumption created under state law or state law is premised upon form over substance, then that state law will yield to the analysis of whether a document that's labeled a lease on its face is in fact a true lease and therefore entitled to the substantive rights granted to the lessor under 365 and elsewhere in the Code, your Honor. So I think that -- that what the disconnect is occurring here and the -- and the confusion on the part of GECC is that it takes the federal question and it melds it into the state law question, and -- and essentially eliminates the purpose of the Code. If state law dictates the rights

that are embodied in 365, then why doesn't each state have a bankruptcy code? It's -- it's your job, your Honor, to

determine what the federal prerequisite is under 365 for those rights to be triggered, and the abundance of case law clearly states that you must find first -THE COURT: in the meantime? MS. HIJJAWI: In the meantime, your Honor, GECC has Right. Fair enough. But what do we do

many rights under the Code to protect -- to seek protection. It can seek adequate protection. logical -THE COURT: Well, but why would it -- why would it And that is really the most

do that if it claims a 365 right to rent?

35

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 trial. meantime?

MS. HIJJAWI:

Because the only -- the only -- we --

we agree that the Bankruptcy Code suspends rights of creditors for very compelling purposes, but it does so with the promise that it will protect those creditors. So 365 says we don't

care if you call yourself a lessor, and we don't care if you call this a lease; it has to really be a lease for you to get benefits from these rights. THE COURT: MS. HIJJAWI: Let's not use the -And how do we protect you in the

THE COURT:

All right.

Let's not use the word

presumption for a moment. MS. HIJJAWI: THE COURT: Okay. Let's just ask. We're sitting here at a

The issue under your complaint is, is this lease or

financing; you assert it's a lease, they assert -- I'm sorry, you assert it's financing, they assert it's a lease. the burden of proof and the burden of going forward? MS. HIJJAWI: The Debtors -- the person -- the Who has

entity seeking to recharacterize has the burden of proof. THE COURT: And to me that means by definition that

there is a presumption, meaning we start with the premise that it's a true lease, and you have the burden of going forward and proving otherwise. MS. HIJJAWI: That's right, your Honor.

36

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

THE COURT: MS. HIJJAWI:

That's all that means. Within the context of the state law

analysis because it's state law that creates that presumption. THE COURT: MS. HIJJAWI: THE COURT: Right. That creates that burden. I'm inclined to agree with you. I think

the case law overwhelmingly establishes, and I don't think GECC really asserts otherwise, that when the Code uses the term lease, it means true lease. MS. HIJJAWI: And in the interim, while you

adjudicate that issue, your Honor, it's entitled to protection. And what is protection in this context? We've

already paid them $13 million post-petition on equipment that we allege at the best and highest value is worth $21 million. The adequate protection for GECC, while it waits your adjudication, is a determination as to what the fair market rental value is on this equipment, because but for the bankruptcy and but for the litigation pending, they would have the right to rent the equipment to someone else. So it should

not be entitled to get more at the expense of the estate than it would otherwise be able to get if it won, if it took its equipment and went out and rented it to somebody else. As long as the Court provides that GECC is getting what it could otherwise get in the market, there's no -- there is no prejudice or damage to GECC, whatever the result is of

37

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

the litigation. In addition, your Honor, the actual lease payments are so high in relation to the value of the collateral, that if you were to find that GECC's a secured creditor, we would have paid them off the full value of the collateral at its highest and best use. That's not protection, your Honor.

That's granting them their claim in full before we have a plan of reorganization, before any other creditor gets their claims allowed and paid. So really, your Honor, the relevant issue here and the motion that should have been filed is protect us, your Honor, while you adjudicate the federal prerequisite to the triggering of the rights under 365. And I think that it's very telling, your Honor, that GECC has not come into this courtroom and told you how much this equipment is worth. They want adequate protection

because, one, the amounts that we paid them post-petition adequately protect them for the next two years. And for two,

they don't want to tell you what the equipment's worth because that translates into zero or not much adequate protection. So, your Honor, the Debtors -THE COURT: All right. Well, I can see why you're

arguing that, but I cannot find fault or error with GC -- GECC asking this Court under Section 365 to compel the payment of rent if they think they're entitled to it. The lease

38

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

payments.

And so I think it's in the best interest of all

concerned that we have a -- a preliminary non-binding finding regarding that pending your further discovery and pending an ultimate trial on the issue. So I am going to propose to give

you each 60 minutes to present whatever offer of proof and documents you'd like on the issue of whether this is financing or a lease, and we'll have a preliminary decision on that which will govern whether in the meantime GECC gets lease payments or not, and if they want adequate protection, they can file a motion for that. MS. HIJJAWI: Your Honor, may I request that -- that

in conjunction with this we -- the parties also be allowed to -- to -- well, the valuations are going to come in through this, through this -THE COURT: MS. HIJJAWI: Sure. That's important.

-- but I would like the opportunity to

brief the issues if that is the case, because if you do in fact find that these are true leases, I think then the equity in the case kicks in and I think we're entitled to, based on the value of the equipment, make an argument that GECC is not entitled to full payments under the leases, if they are in fact leases. THE COURT: MS. HIJJAWI: THE COURT: Does the Code permit that? Yes, it does. What section?

39

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 sides? boss. table.

MS. HIJJAWI: the Code says.

It's 365(d)(10) is essentially what

If you like, I can grab it and read it to you,

but what it says is -THE COURT: section number. MS. HIJJAWI: THE COURT: (d)(10), 365 (d)(10). Okay. Hold on. I see it here. I have it. I was just looking for a

Well, yes, I think we -- I'm sorry? MR. EATON: want to come up -MS. HIJJAWI: THE COURT: MR. EATON: My boss, your Honor. Well -No, your -- your boss is sitting at the I -- I apologize, your Honor. I didn't

MS. HIJJAWI:

You're right.

That's right.

The real

THE COURT:

I think we will have to include that if

your -- if that is one of your arguments. So does 60 minutes sound like enough time to both

MS. HIJJAWI:

I would imagine it's enough time for

the hearing, your Honor, but I would also ask that you give us some time to do limited discovery. Most of the Debtors' This deal

documents are in -- in the hands of third parties. went --

40

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 quickly.

THE COURT: MS. HIJJAWI: THE COURT:

What third parties? Hartland Partners L.L.C. Is there any reason to believe you can't

get them tomorrow if you ask nicely? MS. HIJJAWI: MR. EATON: Mr. Eaton. Your Honor, I'd like to address that. I need to be measured

Your Honor, this is a delicate matter. in what I say.

The -- there are ongoing -- as -- as the Court is aware, ongoing investigations by governmental agencies where -- and we don't want to step on the feet of those agencies, and so we need to be careful as to when we -- when we can get things and to respect those investigations. that -THE COURT: you're talking about. MR. EATON: THE COURT: regarding leases? MR. EATON: Your Honor, I hope we can get them very Well -You're talking about information You're so measured I don't know what But having said

MS. HIJJAWI:

And your Honor, part of the problem

can be solved by requiring GECC to turn over all the files they have that relate to the Textron acquisition and the master leases, and its relationship with Hartland Partners and

41

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Collins & Aikman.

They may have what Hartland has. I'm sure they would be very happy to do

THE COURT:

that in due course, but look, you filed a lawsuit asserting that these leases are financing. evidence to support that position. MR. EATON: THE COURT: MS. HIJJAWI: Yes. Let's see what it is. That's -- you're right, your Honor. I -- I assume you have

But on the other hand, GECC has its evidence, and I think the Debtors are entitled to -THE COURT: Oh, I would propose an exchange of Sure. Great. Sure.

evidence before the hearing. MS. HIJJAWI: THE COURT: MS. HIJJAWI: produce it. THE COURT: books. MS. HIJJAWI: THE COURT: Okay. Okay. Sure.

So you can't use anything unless you

What I want you to do is prepare exhibit

Great.

And prepare your written, you know,

affidavits of whatever witnesses you would call. MS. HIJJAWI: THE COURT: Okay. And then make your 60-minute pitches or

30-minute or however much time we agree is fair on both sides. MS. HIJJAWI: So no live witnesses, your Honor?

42

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

THE COURT: MS. HIJJAWI: THE COURT: MR. DUBLIN: committee.

Right. With declarations kind of -Right. Your Honor, Phil Dublin for the

A couple things real quick.

We joined in the -- in the Debtors' objection, and we are in the process of contemplating intervening in the adversary proceeding, with the understanding of the Court's prior rulings in connection with Smartworld and how the committee should act in those -- in those circumstances. We

would just like to make sure that some time is reserved to us to the extent we think it's necessary. We'll of course

coordinate with the Debtors and do everything -THE COURT: I can't imagine that any time will be

necessarily reserved for you other than for you to stand up and say you agree with the Debtor. MR. DUBLIN: THE COURT: MR. DUBLIN: Thank you, your Honor. Can you? I think there are certain equities that

we might want to focus on that may be particular to unsecured creditors in connection with that portion of the briefing issue and how it may affect unsecured creditors. THE COURT: All right. Well, negotiate with the

Debtor to divide the time.

If you can't agree upon how to

divide it, I guess I'll work it out for you.

43

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 not --

MR. DUBLIN:

Will we permitted to submit papers if

THE COURT:

How could you possibly submit anything

different than the Debtors? MR. DUBLIN: Again, there may be issues specific to

unsecured creditors in connection with balance of the equities, how things may turn out, pending your resolution, that we think may be -- that's something you might want to consider in your ruling. I'm not -- we of course will

coordinate with the Debtors and try to not file a pleading, or maybe just join in their pleading with -- with -THE COURT: that first. MR. DUBLIN: THE COURT: We will. If after trying you feel like you need Yeah. I would urge you to try to do

to do something apart because the -- because the Debtor refuses to include some document you want, sure, I'll receive it. MR. DUBLIN: so you're aware. And we'll advise the Court beforehand

Thank you. All right. Sir?

THE COURT: MR. ATHANAS:

Your Honor, I just rise to ask that

this mini trial happen as soon as humanly possible. THE COURT: MR. ATHANAS: Right. And -- and that's really --

44

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 for me. each?

THE COURT:

Yeah, I'm talking about an exchange

within two weeks and a hearing in three, something like that. MR. ATHANAS: THE COURT: MS. HIJJAWI: THE COURT: THE CLERK: THE COURT: That's fine, your Honor. Can you do that? Yes, sir. Okay. So what's two weeks from today.

May 25th. All right. An exchange of exhibit books Am

and witness affidavits by then, and hearing the next week. I here the next week? (At about 3:01 P.M. - discussion off the record.) THE CLERK: THE COURT: June 1st at two o'clock.

Do you really think you need 60 minutes Thirty minutes? You

How much time do you need each?

tell me. advance.

Keep in mind that I will have read everything in

MS. HIJJAWI:

I was going to say, based on your

performance today, your Honor -MR. ATHANAS: Yeah. You made most of my arguments Your

I didn't even have to respond to Ms. Hijjawi.

Honor, I think 30 minutes would probably do it for both of us. MS. HIJJAWI: THE COURT: Yeah. All right. That's what we'll say then.

Anything further on this one? MR. ATHANAS: Your Honor, I'd just like to reserve

45

1 2 3 4 5 6 7 8 9 10 11

for the record -- you know, there was a lot of argument made that we didn't get the opportunity to respond to. we reserve our right to respond at a later date. THE COURT: MR. ATHANAS: MS. HIJJAWI: concludes -THE COURT: has? All right. Collins & Aikman, anything else anybody Right. And it's all in your papers. Obviously

Thank you, your Honor. Thank you, your Honor. I think that

Thank you. Thank you, your Honor.

MR. ATHANAS:

(At about 3:02 P.M. - hearing concluded.) _ _ _ I certify that the foregoing is a correct transcript of the proceedings held in the above-entitled matter. DATED: May 31, 2006

Lynn L. Simmons, Transcriber

46