IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: ALLIED SYSTEMS HOLDINGS, Inc., et al.

: : : : : : : : Chapter 11

Bankruptcy No. 12-11564-CSS Jointly Administered

Debtor(s),

Hearing Date: August 28, 2012 @ 11:00 a.m. Objection Deadline: July 30, 2012 @ 4:00 p.m.1

OBJECTION OF THE UNITED STATES TRUSTEE TO THE APPLICATION OF DEBTORS FOR AN ORDER AUTHORIZING THE RETENTION AND EMPLOYMENT OF GOWLING LAFLEUR HENDERSON LLP AS CANADIAN COUNSEL TO DEBTORS NUNC PRO TUNC TO JUNE 10, 2012 (D.E. 207) COMES NOW, Roberta A. DeAngelis, Acting United States Trustee for Region Three (the U.S. Trustee), by and through her counsel, and Objects to the Application of Debtors Pursuant to 11 U.S.C. '327(a) for Entry of an Order Authorizing the Debtors to Employ and Retain Gowling Lafleur Henderson LLP as Canadian Counsel Nunc Pro Tunc to June 10, 2012 (D.E. 207) (Application)2 as follows: BACKGROUND 1. Pursuant to 28 U.S.C. ' 586, the UST is charged with the administrative oversight of

cases commenced pursuant to Title 11 of the United States Bankruptcy Code. 2. Pursuant to 11 U.S.C. ' 307, the UST has standing to be heard in this matter.

Extended to July 30, 2012 at 4:00 p.m. for U.S. Trustee. Terms shall have the same meaning ascribed to them in the Application unless otherwise noted.

3.

On May 17, 2012, involuntary petitions were filed against Allied Holdings and its

subisidiary Allied Systems, Ltd. (Allied Systems), seeking the entry of an order for relief under Chapter 11 of the Bankruptcy Code. On June 10, 2012, Allied Systems consented to the entry of an order for relief and the remaining debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. On July 10, 2012, the Debtors filed the Application. The U. S. Trustee objects to the Application as to GLH because GLH has an actual conflict of interest and is therefore not disinterested. Statement of Facts 4. Paragraph 5 to the Affidavit of Christopher J. Eustace in Support of Application of

Debtors for an Order Authorizing the Retention and Employment of Gowling Lafleur Henderson LLP (Eustace Declaration) discloses that in the ninety days preceding June 10, 2012, GLH received $181,762.16 in Payments from the Debtors. 5. Attachment 1 to the Eustace Declaration identified a payment of $88,822.35 made by

the Debtors on June 6, 2012 to pay nine outstanding invoices. The U. S. Trustee requested further detail about these payments. On July 20, 2012, the U.S. Trustee was provided with a proposed Supplemental Affidavit of Christopher J. Eustace containing a more detailed Attachment 1. The greater detail disclosed that payment of the $88,822.35 on June 6, 2012 represented payment of invoices ranging from June 30, 2011 through April 30, 2012. 6. The Debtors filed their various Statement of Financial Affairs (SOFA) and

Schedules of Assets and Liabilities (Schedules, or collectively, Statements and Schedules) on July 25, 2012. The SOFA for Allied Systems Canada Company (D. E. 295) discloses a total of

$181,762.16 in payments to GLH by this debtor in the ninety days preceding the filing of the bankruptcy. This amount includes the payments described in the preceding paragraph. 7. The Schedules for Allied Systems Canada Company (D.E. 294) disclose on page 40

of Schedule F a debt owed to GLH in the amount of $17,262.26. GROUNDS AND BASIS FOR RELIEF GLH is Not Disinterested A. GLH Has an Actual Conflict of Interest 8. 11 U.S.C. '327(a) permits the retention of professional persons ...that do not hold or 11 U.S.C.

represent an interest adverse to the estate...and that are disinterested persons.

'101(14)(C) provides, in pertinent part, that a disinterested person: does not have an interest materially adverse to the interest of the estate...by reason of any direct or indirect relationship to, connection with, or interest in, the debtor...or for any other reason. 9. 11 U.S.C. '327(c) reads in full as follows: In a case under chapter 7, 12, or 11 of this

title, a person is not disqualified for employment under this section solely because of such person=s employment by or representation of a creditor, unless there is an objection by another creditor or the United States Trustee, in which case the court shall disapprove such employment if there is an actual conflict of interest. 10. In evaluating whether a professional holds or represents an interest adverse to the

interest of the estate with respect to the matter on which such professional is employed, it is clear that actual conflicts of interest are per se disqualifying. In addition, while potential conflicts do not disqualify a professional per se, they are disfavored. See In re Marvel Entertainment Group, Inc.,

140 F.3d 463, 476 (3d Cir. 1998) (quoting In re BH & P, Inc., 949 F.2d 1300, 1316-17 (3d Cir. 1991)). 11. The case of In re BH & P, Inc., 949 F.2d 1300, (3d Cir. 1991) remains the seminal

case in the Third Circuit on the issue of a materially adverse interest. In BH&P, Inc., supra,the court affirmed the disqualification of a trustee and his proposed counsel where actual conflicts of interest existed between two jointly administered estates. In its opinion, the court also noted that its ruling applied with equal force to all professionals subject to retention under Section 327 of the Bankruptcy Code:...the conflict of interest principles which we have adopted regarding disqualification of trustees apply with equal force in those situations involving the employment of professionals. 949 F.2d at 1316. 12. In In re Marvel Entertainment Group, Inc., 140 F.3d 463 (3d Cir. 1998), the court

permitted the trustee=s law firm to represent the trustee where the firm=s representation of a creditor in matters unrelated to the case created only the potential for a conflict, and in so doing, reiterated the BH&P ruling: ...we have studied our previous decision in great detail and today expressly reiterate its holding: (1) Section 327(a), as well as '327(c), imposes a per se disqualification as trustee=s counsel of any attorney who has an actual conflict of interest; (2) the district court may within its discretionBpursuant to '327(a) and consistent with '327(c)Cdisqualify an attorney who has a potential conflict of interest and (3) the district court may not disqualify an attorney on the appearance of conflict alone. 13. Where one member of a firm is disqualified, then the entire firm is disqualified. In

In re Essential Therapeutics, 295 B.R. 203 (Bankr. D. Del. 2003), a law firm was disqualified where one of its members was an officer and where the firm proposed to establish an ethical wall preventing the conflicted member from receiving any information about the case. Judge Walrath 4

stated: We conclude that having one member=s independence and disinterestedness impugned because he was an officer must equally affect the firm=s independence and disinterestedness such that the firm must be disqualified under Section 327(a) of the Code. 295 B.R. at 211. B. Pre-Petition Payments and Claims 14. It is settled law in the Third Circuit that receipt of a preferential transfer constitutes an actual conflict of interest between a professional and the debtor that requires a professional to be disqualified from retention. See In re First Jersey Securities, Inc., 180 F.3d 504, 509 (3d Cir. 1999); In re Pillowtex, Inc., 304 F.3d 246, 252 (3d Cir. 2002). As the Third Circuit specifically stated in Pillowtex: [t]he receipt of a preference by a creditor thus creates a conflict with unpaid creditors, whose share of the remaining assets is diminished by the payment. Id. 15. In the present case, GLH received numerous payments in the ninety days preceding

the filing of the Petitions herein. The analysis of all invoices issued and payments received during the 90 day period provided to the U.S. Trustee discloses that the $88,822.35 paid on June 8, 2012 was to pay antecedent invoices avoidable as preference payments. The payments were made by Allied Systems Canada, one of the Debtors who filed a voluntary petition on June 10, 2012.3 16. In addition, to the extent GLH is owed prepetition fees from any debtor, or to the

extent it may repay any payments made during the 90 days preceding the filing of the petitions herein, GLH may not thereafter assert a claim against the estate. To do so will render GLH not disinterested pursuant to United States Trustee v. Price Waterhouse, 19 F.3d 138 (1994) where a proposed professional with a prepetition claim was not disinterested within the meaning of Section

3 Had the June 8, 2012 payments been made by one of the involuntary debtors, then the payments would be avoidable pursuant to 11 U.S.C. 549(b) since they were payments to satisfy a debt that arose before commencement of the case.

101(14)(A). Holding a claim against a debtor renders a professional not disinterested. The GLH claims contained in the Schedules also render GLH not disinterested. 17. The UST reserves the right to further amend this Objection to assert such other

grounds as may become apparent upon further investigation and/or discovery and leaves the Moving Party to its burden of proof. Conclusion 18. GLH has an actual conflict of interest in this case. Section 327(c) of the Bankruptcy

Code precludes GLH=s retention in this case. GLH has received payments avoidable as preferences and is a creditor of a debtor. Absent a return of the preference payments and a waiver of its claims against the Debtor, GLH is not qualified to be retained in this case. WHEREFORE, the United States Trustee respectfully prays that this Honorable Court enter an order denying the Application as to GLH, and for such other relief as this Honorable Court may deem proper. Respectfully submitted, ROBERTA A. DeANGELIS United States Trustee, Region Three Dated: July 30, 2012 By: __________/s/________________ David L. Buchbinder, Esq. Trial Attorney Office of the United States Trustee J. Caleb Boggs Federal Building 844 King Street, Ste. 2207, Lockbox 35 Wilmington, DE 19801 (302) 573-6491

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: ALLIED SYSTEMS HOLDINGS, INC. et. al. : : : : : : : Chapter 11

Bankruptcy No. 12-11564-CSS Jointly Administered

Debtors,

CERTIFICATE OF SERVICE I certify that, on July 30, 2012, I caused to be served a copy of the Objection of the United States Trustee to Application of Debtors Pursuant to 11 U.S.C. '327(a) for Entry of an Order Authorizing the Debtors to Employ and Retain Gowling Lafleur Henderson LLP as Canadian Counsel Nunc Pro Tunc to June 10, 2012 (D.E. 207) (Application) upon the following persons by First Class United States Mail: Mark D. Collins, Esq. Christopher M. Samis, Esq. Richards, Layton & Finger, P.A. One Rodney Square 920 North King Street Wilmington, DE 19801 Jeffrey W. Kelly, Esq. Ezra H. Cohen, Esq. Troutman Sanders LLP 660 Peachtree Street, Ste. 5200 Atlanta, GA 30308-2216

/s/ David L. Buchbinder, Esq. Trial Attorney