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

et al. Debtors. ) ) ) ) ) ) ) ) Chapter 11 Case No. 05-55927 (SWR) (Jointly Administered) (Tax Identification # 13-3489233) Honorable Steven W. Rhodes

OBJECTION OF OFFICIAL COMMITTEE OF UNSECURED CREDITORS TO DEBTORS MOTION TO APPROVE SETTLEMENT AND COMPROMISE FOR CLAIMS WITH RESPECT TO AUTOALLIANCE INTERNATIONAL, INC. AND RCO ENGINEERING, INC. The Official Committee of Unsecured Creditors (the Committee) of Collins & Aikman Corporation, et al. (collectively, the Debtors), by and through its undersigned counsel, hereby submits this objection (the Objection) to Debtors Motion to Approve Settlement and Compromise of Claims with Respect to Autoalliance International, Inc. and RCO Engineering, Inc. (the Motion). In support of this Objection, the Committee respectfully represents as follows: PRELIMINARY STATEMENT 1. By its Motion, the Debtors seek authority to enter into a settlement and

compromise agreement (the Agreement) to settle certain claims between the Debtors, Auto Alliance International, Inc. (AAI) and RCO Engineering, Inc. (RCO) including, without limitation, claims for AAIs violation of the automatic stay when AAI resourced the J56L/N Mazda 6 Door Trim Program (J56L Program) from the Debtors to another supplier during the pendency of these cases. 2. While the economics of the Agreement appear to provide certain benefits to the

Debtors estates, the uncertainty regarding the Debtors continuing relationship with AAI raises
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questions as to whether the proposed Agreement, as a whole, is in the best interests of the Debtors estates. Specifically, the Agreement (a) fails to provide the Debtors with any protection from AAI resourcing over $100 million in additional programs currently sourced to the Debtors and (b) saddles the Debtors with inventory relating the J56L Program that the Debtors cannot use for any other programs. 3. Accordingly, unless the Agreement is modified to protect the Debtors from the

further resourcing of any of AAIs programs so long as the Debtors continue to comply with applicable standards for quality, service and delivery, until at least September 30, 2006, and AAI is required to purchase the remaining inventory related to the J56L Program, the Agreement should not be approved. BACKGROUND 4. On May 17, 2005 (the Petition Date), each of the Debtors filed with this Court a

voluntary petition for relief under chapter 11 of title 11 of the United States Code (the Bankruptcy Code). 5. On May 24, 2005, the United States Trustee appointed an official committee of

unsecured creditors pursuant to section 1102 of the Bankruptcy Code (the Committee). The AAI Dispute 6. AAI is a joint venture between Ford Motor Company and Mazda, which provides

the Debtors approximately $115 million in annualized revenue. 7. On November 24, 2003, AAI awarded the sourcing for the J56L Program to the

Debtors. The J56L Program provided the Debtors with approximately $8.1 million in annual revenue. The Debtors also source other programs for AAI, including, but not limited to, the

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S197 Mustang Program, which program provides the Debtors with approximately $102 million in annual revenue. 8. On or about July 1, 2005, over 6 weeks after the Petition Date, AAI sent a letter to

the Debtors asserting that the Debtors were in breach of the AAI purchase order terms and conditions for the J56L Program for failure to meet a program milestone. In that letter, AAI made an offer of settlement to resource and transition the existing equipment/materials located in the Debtors facilities in exchange for payment of certain engineering, design and testing costs. 9. On or about July 8, 2005, AAI sent another letter to the Debtors (the July 8

Letter) asserting that it believed the Debtors to be in material default under the terms and conditions relating to the program, demanded immediate possession of the tooling at the Debtors facilities, and advised the Debtors that the J56L Program was being resourced. 10. On or about July 11, 2005, the Debtors responded in writing disputing the July 8

Letter and stated that AAI breached its contract with the Debtors. 11. Notwithstanding the Debtors position, AAI resourced the J56L Program.

The RCO Dispute 12. As part of the J56L Program, the Debtors contracted with RCO to obtain capital

equipment needed for the program (the Equipment). 13. RCO claims to have a valid tooling lien against the Equipment delivered by RCO

to the Debtors relating to the J56L Program. 14. The Debtors dispute the RCO Equipment payment obligation. OBJECTION I. The Agreement is not in the Best Interests of the Estates

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15.

The settlement approval process permitted by Bankruptcy Rule 9019(a) is

discretionary, not mandatory. In re Dalen, 259 B.R. 586, 598-99 (Bankr. W.D. Mich. 2001). Courts determine whether to approve settlements pursuant to Bankruptcy Rule 9019 by assessing whether the settlement is fair and equitable and in the best interests of the estate. In re Engman, 2005 Bankr. LEXIS 1887, *24-25, Case No. HG 01-13070, (Bankr. W.D. Mich. September 23, 2005). Neither of these phrases, in and of itself, offers much guidance as to exactly what the court is to consider in response to a Rule 9019(a) request, and therefore the courts have developed checklists to give meaning to these phrases. Id. at *24-26. 16. The court in Drexel v. Loomis, 35 F.2d 800, 806 (8th Cir. 1929) set forth one

checklist to determine whether to approve a settlement pursuant to Bankruptcy Rule 9019: (1) the probability of success in the litigation; (2) the difficulties of collecting any litigated judgments; (3) the complexity of the litigation and the expense, inconvenience and delay necessarily attending it; and (4) the interests of the creditors and interest holders of the estate. Engman, 2005 Bankr. LEXIS 1887 at *24-26 (referencing In re Jackson Brewing Co., 624 F.2d 605, 607 (5th Cir. 1980). This checklist, however, requires a framework within which to be applied. Engman, 2005 Bankr. LEXIS 1887 at *26-27. Courts must consider the Debtors performance as a fiduciary of the bankruptcy estate as the context within which these and other relevant factors must be considered. Id. (citing Dalen at 610-615 (the ultimate objective of the Rule 9019(a) approval process is to procure from the court a declaration that the trustee, in arriving at the settlement proposed, has properly exercised the duties imposed upon him as a fiduciary of the bankruptcy estate...the duties of obedience, loyalty, and care.)); In re Fortran Printing, Inc., 297 B.R. 89, 96 (Bankr. N.D. Ohio 2003)(The focus of Rule 9019 is to protect

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other creditors against bad deals made between one creditor and the debtor.)(internal citations omitted). 17. Courts have denied motions to approve a compromise under Bankruptcy Rule

9019(a) when the movant has failed to satisfy the factors set forth in these checklists, as fair and equitable and in the best interest of the creditors of the bankruptcy estate. See, e.g., In re Swallens, Inc., 210 B.R. 123, 127 (Bankr. S.D. Ohio 1997) (court denied motion to approve settlement under 9019 because, although the monetary amount of the settlement was fair and equitable, in the best interests of the estate, and could be approved by this court, the court would not approve the release/injunction aspect of the settlement agreement). 18. While the Committee believes that the economics of the Agreement provide

certain benefits to the Debtors estates, the lack of assurance surrounding the Debtors ongoing relationship with AAI and the financial burden borne on the estates in respect of remaining J56L Progam inventory, make the Agreement unreasonable. Indeed, the Agreement is totally void of (a) any protection for the Debtors to prevent AAI from resourcing any additional programs and (b) a provision requiring AAI to purchase all inventory related to the J56L Program to indemnify the Debtors from shouldering losses resulting from AAIs wrongful resourcing of the J56L Program in violation of the automatic stay. 19. As the Court is aware, the Committee is of the view that, in order for the Debtors

to have a sufficient opportunity to reorganize and realize substantial cost savings to return Collins & Aikman to efficiency and profitability, it needs assurances from its customers that they will not resource the Debtors programs. Thus, absent a provision in the Agreement prohibiting AAI from resourcing any other program currently sourced to the Debtors until at least September 30, 2006 (so long as the Debtors maintain applicable standards for quality, service and delivery),

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the Agreement does not adequately protect the Debtors from AAIs further resourcing of valuable programs or provide the Debtors with any certainty of having an opportunity to reorganize. 20. In addition, the Committee submits that the Debtors should not be economically

harmed by AAIs resourcing of the J56L Program. As such, AAI should be required to purchase all of the Debtors J56L Program inventory at a fair and reasonable price.

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CONCLUSION For all of the foregoing reasons, the Committee respectfully requests that the Court (i) deny the Motion unless the Agreement is modified to (a) prohibit resourcing of all remaining AAI programs until at least September 30, 2006 on the conditions referenced herein and (b) require AAI to purchase all inventory for the J56L Program and (ii) grant the Committee such other relief as the Court deems just, proper and equitable. Dated: October 12, 2005 BUTZEL LONG By: /s/ PAULA A. HALL (P61101 Thomas B. Radom, Esquire (P24631) Paula A. Hall, Esquire (P61101) Suite 200 100 Bloomfield Hills Parkway Bloomfield Hills, MI 48304 Telephone: (248) 258-1413 Facsimile: (248) 258-1439 Email: radom@butzel.com

AKIN GUMP STRAUSS HAUER & FELD LLP Michael S. Stamer Philip C. Dublin Alexis Freeman 590 Madison Avenue New York, NY 10022-2524 Telephone: (212) 872-1000 Facsimile: (212) 872-1002 Email: mstamer@akingump.com pdublin@akingump.com afreeman@akingump.com
Counsel for the Official Committee of Unsecured Creditors

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