Case 11-37790-DOT

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IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF VIRGINIA RICHMOND DIVISION In re: Chapter 11 ROOMSTORE, INC., Case No. 11-37790 (DOT) Debtor. EMERGENT MOTION OF THE DEBTOR FOR THE ENTRY OF AN ORDER IMMEDIATELY CONVERTING THE DEBTORS CHAPTER 11 BANKRUPTCY CASE TO A CHAPTER 7 BANKRUPTCY CASE AND REQUESTING THE IMMEDIATE APPOINTMENT OF A CHAPTER 7 TRUSTEE Roomstore, Inc., the debtor and debtor-in-possession (the Debtor) in the abovereferenced Chapter 11 bankruptcy case, hereby seeks the entry of an order, pursuant to 1112(a) of the Bankruptcy Code, substantially in the form annexed hereto as Exhibit A, to immediately convert the Debtors Chapter 11 bankruptcy case to a Chapter 7 bankruptcy case and to direct the Office of the United States Trustee to immediately appoint a Chapter 7 Trustee, and to grant such other further relief as the Court deems just and proper (the Motion). In support of this Motion, the Debtor respectfully represents as follows:

LOWENSTEIN SANDLER PC Kenneth A. Rosen (NJ Bar No. 02160) Bruce D. Buechler (NJ Bar No. 02886) Mary E. Seymour (NJ Bar No. 04564) Cassandra M. Porter (NJ Bar No. 01917) Andrew David Behlmann (NJ Bar No. 03878) 65 Livingston Avenue Roseland, New Jersey 07068 (973) 597 2500 - and KAPLAN VOEKLER CUNNINGHAM & FRANK, PLC Troy Savenko (Va. Bar No. 44516) Christopher J. Hoctor (Va. Bar No. 45467) Leslie A. Skiba (Va. Bar No. 48783) 7 East 2nd Street (23224-4253) Post Office Box 2470 Richmond, Virginia 23218-2470 (804) 423-7921 Counsel to the Debtor and Debtor-in-Possession 20619/6 07/20/2012 21096700.1

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JURISDICTION 1. This Court has jurisdiction over this Motion under 28 U.S.C. 157 and 1334.

This is a core proceeding as defined in 28 U.S.C. 157(b). Venue of this case and this Motion in this District is proper under 28 U.S.C. 1408(a) and 1409. 2. Code. BACKGROUND A. General Background. 3. On December 12, 2011 (the Petition Date), the Debtor commenced its The statutory predicate for the relief sought herein is 1112 of the Bankruptcy

bankruptcy case by filing with the Court a voluntary petition for relief under chapter 11 of the Bankruptcy Code. 4. The United States Trustee for the Eastern District of Virginia (UST) appointed

an official committee of unsecured creditors of the Debtor (the Committee) on December 19, 2011 [Docket No. 91]. 5. The Debtor continues to manage and operate its business as a debtor-in-

possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. No trustee or examiner has been appointed in the bankruptcy case. 6. General information about the Debtor, its business, its capital structure, and the

events leading to the filing of the Bankruptcy Case is contained in the Declaration of Lewis M. Brubaker, Jr., Senior Vice President and Chief Financial Officer of RoomStore, Inc., in Support of Chapter 11 Petition and First-Day Pleadings [Docket No. 15]. 7. In early May 2012, the Debtor realized its efforts to sell its business in its entirety

or to successfully reorganize its business operations had failed. Thus, with the approval of the Committee and its post-petition secured lender, Salus Capital Partners, LLC (Salus) the Debtor put its operating assets up for sale via a going out of business sale process. The sale

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process, which had been advocated repeatedly by the Committee, resulted in less proceeds than expected by the parties. 8. On June 28, 2012, the Court entered (a) the Order Approving Entry Into FAA

Agency Agreement and Sale of FAA Acquired Assets Free and Clear [Docket No. 773], and (b) the Order Approving Entry Into Agency Agreement With Hilco Merchant Resources LLC, et al., and Authorizing Going Out of Business Sale Procedures and Conduct of Going Out of Business Sale by Debtor and Agent Free and Clear [Docket No. 774], pursuant to which the Debtor, in conjunction with Furniture Asset Acquisition, LLC and a joint venture led by Hilco Merchant Resources LLC, is conducting going-out-of-business sales (the GOB Sales) at all of the Debtors remaining retail store locations, including the inventory, furniture, fixtures, and equipment contained in the Debtors warehouse and distribution center located in Rocky Mount, North Carolina. The guaranty payments in respect of the GOB Sales were paid directly to the Debtors postpetition secured lender, Salus, which holds a first-priority security interest on substantially all of the Debtors assets, including a first position security interest in the assets of the Debtors 65%-owned subsidiary, Mattress Discounters Group, LLC (MDG), up to $5 million. 9. The Debtor no longer has any ongoing retail business operations. The Debtor

continues to provide back-office operations to support the GOB Sales and perform certain administrative functions for MDG, for which MDG now pays the Debtor approximately $18,000 per month. 10. The Debtors remaining assets are comprised primarily of its 65% membership

interest in MDG (the MDG Interest); a 31% membership interest in Creative Distribution Services, LLC (CDS); various Debtor-owned unexpired leases of nonresidential real property (the Leases); a distribution center located in Rocky Mount, North Carolina (the Rocky Mount DC); certain machinery and rolling stock located in the Rocky Mount DC (the DC Equipment); and the building for the Debtors former retail store location in Myrtle Beach, South Carolina, which is subject to a mortgage lien in an amount that may exceed the value of -3-

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the building (collectively, the Remaining Assets). As set forth in the Debtors Disclosure Statement [Docket No. 634], the Debtor estimates the value of the MDG Interest at between $7.8 million and $19.5 million, the Rocky Mount distribution center at between $4 million and $5.5 million, and the CDS interest at between $2.7 and $3.7 million, along with other assets. Thus, the Debtors estate has very valuable assets, but without support from Salus, it has no cash flow to operate while it moves to market and sell these assets in an economically efficient manner. 11. Since the GOB Sales have commenced, the Debtors sole source of funds for its The Debtor has repeatedly

operations has been through its senior secured lender, Salus.

requested that Salus release funds so that post-petition taxes and other required obligations that were included in the Debtors budget since late June could be paid. Unfortunately, Salus only funded certain requests and, therefore, items such as the post-petition taxes were not paid. Then, on July 18, 2012, at approximately 6:30 p.m., the Debtor received three letters from Salus alleging Events of Default under the DIP Loan Agreement have occurred and providing the Debtor three business days notice as required by the DIP Loan Agreement and the Final DIP Order entered on January 5, 2012 [Docket No. 222] that Salus intends to exercise its rights and take possession of its collateral, which is substantially all of the Debtors assets. Salus has taken this action even though it is vastly over secured and thus adequately protected. At this time, Salus has only approximately $1.4 million of debt outstanding. The Debtor has no cash collateral or other sources of cash with which to operate its remaining business. Thus, the Debtor has no cash to pay its remaining employees, pay rent for its Richmond, Virginia headquarters, pay for required insurance (such a liability, workers compensation and health) or any other operating expenses. Further, the Debtor does not have the funds to provide the back office services for the GOB Sales and the services it provides to MDG. While the Debtors have spent the past approximate 2 - 3 weeks negotiating with Salus to try and reach a resolution to authorize the sale of additional assets and obtain a budget for funding, it has failed to do so.

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12.

The Debtors have been seeking to engage an investment banker to sell the MDG

Interest since it filed an application to retain Northeast Securities, Inc. (Northeast), on May 31, 2012 [Docket No. 621]. In response to the Debtors application to retain Northeast as investment banker, objections were filed by the Committee [Docket No. 710], MDG and Raymond Bojanowski [Docket No. 629], and Salus [Docket No. 748]. The Debtor filed an omnibus reply (including three declarations) [Docket No. 735]. In light of these objections, at the hearing held on June 26, 2012, the Debtor agreed to adjourn its application seeking to retain Northeast and advised both the Committee and Salus that it would accept any qualified investment banker they agreed to. The Debtors Board, stepping in to try to resolve this delay, sent emails to the Committee and Salus on June 28, June 29, July 9 and July16 requesting approval of Carl Marks Securities (Carl Marks), an investment banker apparently acceptable to the Committee and Salus. The Committee had begun directly negotiating with Carl Marks, but then apparently stopped. It was not until approximately July 16, 2012 that the Debtor finally heard from both Salus and the Committee that they would agree to the retention of Carl Marks as an investment banker to market the MDG Interest, subject to the Debtor negotiating the terms of Carl Marks engagement when previously the Debtor was advised the Committee planned to negotiate directly with Carl Marks. Upon direction from the Committee and Salus, the Board immediately began negotiating an engagement letter and received a preliminary engagement letter from Carl Marks on July 19, which was immediately circulated to the Committee and Salus for comments and approval. 13. However, unknown to the Debtor, Salus in early June had begun its own

unilateral negotiation with Mr. Bojanowski, the minority shareholder of MDG, in an effort to do a quick sale. On July 16, apparently both the Committee and Salus received a sheet of paper in the mid-afternoon from Mr. Bojanowski describing his terms of sale. Unfortunately, since neither Salus nor the Committee had vetted Mr. Bojanowskis financial abilities to complete a transaction, the paper offer required a financial contingency, which meant that Mr. Bojanowski would have to shop his Salus opportunity to the very strategic buyers that the Debtor wanted -5-

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Carl Marks to market the MDG Interest to. The effect of the Salus negotiations with Mr. Bojanowski will chill bids from potential buyers. Salus provide the Debtor with a copy of the Bojanowski paper offer on July 16 at approximately 9:17 p.m. On a conference call with Salus on July 16 that commenced at 9:30 p.m., Salus demanded that the Debtor agree to their negotiated sale terms or have funding cut off. The Debtors Board expressed concern about Salus acting unilaterally for a period of approximately three weeks to sell assets it did not own without informing the Board. Salus did not deny such discussions took place. Salus also advised the Debtor during this call that the Committee was also actively negotiating with Mr. Bojanowski. The Debtor never authorized Salus or the Committee to have discussions and/or negotiations with MDG or Mr. Bojanowski concerning the terms of a sale of the MDG Interest. On July 18, 2012, Salus sent the letters that have now cut off funding, jeopardizing the financial recoveries for creditors and others. 14. In light of the Debtors current financial situation, the Debtor has no alternative

but to immediately close its remaining operations and request the Court to immediately convert its Chapter 11 bankruptcy case to a Chapter 7 and direct the Office of the United States Trustee to immediately appoint a Chapter 7 trustee for the Debtor and its estate.

RELIEF REQUESTED 15. (a) Bankruptcy Code 1112(a) states: The debtor may convert a case under this chapter to a case under chapter 7 of this title unless (1) (2) (3) the debtor is not a debtor in possession; the case originally was commenced in this involuntary case under this chapter; or the case was converted to a case under this chapter other than on the debtors request.

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Thus, pursuant to 1112(a) of the Bankruptcy Code, the Debtor has the right to seek to immediately convert its Chapter 11 case to a Chapter 7 case. The legislative history to this provision provides subdivision (a) gives the debtor an absolute right to convert a voluntarily commenced Chapter 11 case in which the debtor remains in possession to a liquidation case. House Report No. 95-595, 95th Cong., 1st Sess. 45 (1977); Senate Report No. 95-989, 95th Cong., 2d Sess. 117 (1978). In light of the Debtors financial predicament, the Debtor requests the Court immediately act on its Motion so that a Chapter 7 trustee can be appointed to oppose Saluss attempt to obtain possession of the Debtors assets and destroy economic value for the benefit of creditors. 16. As noted above, the Debtors efforts to sell its Remaining Assets including the

MDG Interest will not happen quickly. The Debtor lost approximately three weeks of progress to market the MDG Interest when the Committee and Salus withheld their approval to hire an investment banker while they both secretly negotiated with Mr. Bojanowski. Given the fact that the Debtor has no cash with which to operate and no prospects of cash coming in the immediate near future, the Debtor cannot continue to operate when it has no funds available to pay administrative expenses, employees, rent, insurance, and other necessary post-petition operating expenses. Thus, the Debtor respectfully submits that it has demonstrated its right to immediately convert its Chapter 11 case to a Chapter 7 bankruptcy case pursuant to 1112(a). 17. Alternatively, cause exists to convert Debtors Chapter 11 case to a Chapter 7

case pursuant to Bankruptcy Code 1112(b). At this point in time, the Debtor will be unable to confirm its plan (the Debtor has filed a Plan and Disclosure Statement which are pending before the Court [Docket Nos. 633 and 634]), there is an absence of the reasonable likelihood of rehabilitation, continued financial loss to the estate, and the Debtor is concerned that in short order it will be unable to maintain appropriate insurance coverage and is currently unable to pay its post-petition obligations as they become due in the ordinary course of business. Thus, cause exists to convert the Debtors bankruptcy case to a Chapter 7 under 1112(b).

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18.

The Debtor respectfully submits that a conversion to a Chapter 7 is preferable to

the appointment of a Chapter 11 trustee because there will be a substantial cost savings in a Chapter 7 where the Committee is disbanded and the estate no longer will have any obligation to pay the Committees professionals; the case is truly in a full liquidation mode because the Debtor no longer has any retail operations (its remaining retail operations are being run as GOB Sales by various liquidators pursuant to Court orders); to the extent there are funds available for distribution to creditors, a Chapter 7 trustee can distribute the funds more efficiently as it is not required to go through the plan and disclosure statement approval and confirmation process to make a distribution to creditors; and a Chapter 7 trustee, without any interference by the Committee, will have more leverage against Salus in seeking to maintain the MDG Interest to prevent Salus from exercising its rights under the DIP financing documents and Final DIP Order to take possession of the collateral and sell it for its sole benefit, as opposed to the benefit of all creditors. Thus, the Debtor respectfully submits that conversion of it chapter 11 case to a Chapter 7 is the best alternative and will maximize the value of the Debtors Remaining Assets for the benefit of all creditor constituencies. 19. Conversion is preferable to dismissal so a Chapter 7 trustee can move to market

and sell the MDG Interest and the Remaining Assets and prevent Salus rush to destroy value in order to create funds to distribute to creditors. To the extent the Chapter 7 trustee needs to operate for a short period of time to maximize the value of the Debtors assets, 721 of the Bankruptcy Code authorizes this. Thus, conversion to a Chapter 7 is preferable to dismissal or the appointment of a Chapter 11 trustee. WHEREFORE, the Debtor respectfully requests that the Court immediately enter an Order, in the form annexed hereto as Exhibit A, converting its Chapter 11 bankruptcy case to a Chapter 7 case and directing the Office of the United States Trustee immediately appoint a Chapter 7 trustee, and grant the Debtor such other further relief as the Court deems just and appropriate.

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Dated: July 20, 2012 Richmond, Virginia

Respectfully submitted, /s/ Troy Savenko LOWENSTEIN SANDLER PC Kenneth A. Rosen (NJ Bar No. 02160) Bruce D. Buechler (NJ Bar No. 02886) Mary E. Seymour (NJ Bar No. 04564) Cassandra M. Porter (NJ Bar No. 01917) Andrew David Behlmann (NJ Bar No. 03878) 65 Livingston Avenue Roseland, New Jersey 07068 (973) 597-2500 - and KAPLAN VOEKLER CUNNINGHAM & FRANK, PLC Troy Savenko (Va. Bar No. 44516) Christopher J. Hoctor (Va. Bar No. 45467) Leslie A. Skiba (Va. Bar No. 48783) 7 East Second Street (23224-4253) Post Office Box 2470 Richmond, Virginia 23218-2470 (804) 423-7921 Counsel to the Debtor and Debtor-inPossession

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