UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF INDIANA INDIANAPOLIS DIVISION IN RE: ) ) ITT EDUCATIONAL SERVICES, INC., et al., 1 ) Case No. 16-07207-JMC-7A ) Debtors. ) Jointly Administered TRUSTEE’S MOTION TO COMPROMISE AND SETTLE ADVERSARY PROCEEDING NO. 17-50101 Deborah J. Caruso, the chapter 7 trustee (the “Trustee”) 2 in the above-captioned cases, by counsel, respectfully submits this motion (the “Motion”), pursuant to sections 105(a) and 363 of title 11 of the United States Code (the “Bankruptcy Code”) and rule 9019 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”), for entry of a final order, substantially in the form attached hereto as Exhibit A (the “Proposed Order”), (a) approving the terms of a proposed settlement (the “Settlement”) by and between the Trustee, not individually but solely in her capacity as Chapter 7 trustee for, and acting for and on behalf of the Debtors, and each of the Debtors’ respective bankruptcy estates, on the one hand, and Student CU Connect CUSO, LLC (the “CUSO”), The Rochdale Group, Inc. (“Rochdale”), and Elements Financial Federal Credit Union (formerly known as Eli Lilly Federal Credit Union), Bellco Credit Union, Credit Union of America, Directions Credit Union, Veridian Credit Union, Workers Credit Union and CommunityAmerica Credit Union (together, the “Participating Credit Unions”) (the CUSO, Rochdale and the Participating Credit Unions, together, the “CUSO Parties”), on the other hand, 1 The debtors in these cases, along with the last four digits of their respective federal tax identification numbers, are ITT Educational Services, Inc. [1311]; ESI Service Corp. [2117]; and Daniel Webster College, Inc. [5980]. 2 Capitalized terms used but not defined herein have the meanings given to them in the Settlement Agreement (as defined herein). Case 16-07207-JMC-7A Doc 3391 Filed 05/07/19 EOD 05/07/19 14:19:34 Pg 1 of 23
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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF INDIANA INDIANAPOLIS DIVISION
IN RE: ) ) ITT EDUCATIONAL SERVICES, INC., et al.,1 ) Case No. 16-07207-JMC-7A ) Debtors. ) Jointly Administered
TRUSTEE’S MOTION TO COMPROMISE AND SETTLE ADVERSARY PROCEEDING NO. 17-50101
Deborah J. Caruso, the chapter 7 trustee (the “Trustee”)2 in the above-captioned cases, by
counsel, respectfully submits this motion (the “Motion”), pursuant to sections 105(a) and 363 of
title 11 of the United States Code (the “Bankruptcy Code”) and rule 9019 of the Federal Rules of
Bankruptcy Procedure (the “Bankruptcy Rules”), for entry of a final order, substantially in the
form attached hereto as Exhibit A (the “Proposed Order”), (a) approving the terms of a proposed
settlement (the “Settlement”) by and between the Trustee, not individually but solely in her
capacity as Chapter 7 trustee for, and acting for and on behalf of the Debtors, and each of the
Debtors’ respective bankruptcy estates, on the one hand, and Student CU Connect CUSO, LLC
(the “CUSO”), The Rochdale Group, Inc. (“Rochdale”), and Elements Financial Federal Credit
Union (formerly known as Eli Lilly Federal Credit Union), Bellco Credit Union, Credit Union of
America, Directions Credit Union, Veridian Credit Union, Workers Credit Union and
CommunityAmerica Credit Union (together, the “Participating Credit Unions”) (the CUSO,
Rochdale and the Participating Credit Unions, together, the “CUSO Parties”), on the other hand, 1 The debtors in these cases, along with the last four digits of their respective federal tax identification numbers, are ITT Educational Services, Inc. [1311]; ESI Service Corp. [2117]; and Daniel Webster College, Inc. [5980]. 2 Capitalized terms used but not defined herein have the meanings given to them in the Settlement Agreement (as defined herein).
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which is embodied in that certain settlement agreement (the “Settlement Agreement”), a copy of
which is attached as Exhibit 1 to the Proposed Order, and (b) granting related relief. In support
of the Motion, the Trustee respectfully avers as follows:
Jurisdiction
1. The Court has jurisdiction over the Motion pursuant to 28 U.S.C. §§ 157 and
1334.
2. This is a core proceeding within the meaning of 28 U.S.C. §157 (b)(2).
3. Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409.
4. The statutory bases for the relief requested herein are sections 105(a) and
363(b)(1) of the Bankruptcy Code and Bankruptcy Rule 9019.
Background
5. On September 16, 2016 (the “Petition Date”), each of the Debtors filed a
voluntary petition for relief under chapter 7 of the Bankruptcy Code. The Trustee was appointed
interim trustee in each of the Debtors’ bankruptcy cases on the Petition Date pursuant to section
701(a)(1) of the Bankruptcy Code. The Trustee became the case trustee in each of the Debtors’
bankruptcy cases following the conclusion of the first meeting of creditors on November 1, 2016,
pursuant to section 702(d) of the Bankruptcy Code.
6. On October 4, 2016, the Court entered its Order Granting Motion for Joint
Administration of Chapter 7 Cases [Docs 221-222], directing the Debtors’ bankruptcy cases to
be jointly administered for procedural purposes only.
7. Prior to the Petition Date, the Debtors as a whole were engaged in the for-profit
enterprise of providing post-secondary degree programs in 137 campus locations in thirty-nine
states and through online services.
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8. ITT was a publicly-held company that, as of June 30, 2016, employed over 8,000
employees. ITT offered master, bachelor, and associate degree programs to approximately
40,000 students at its campus locations and online programs to students located in all fifty states
and the District of Columbia. All of ITT’s campus locations were authorized by applicable
education authorities of the states in which they operated and were accredited by an accrediting
commission recognized at the time by the U.S. Department of Education.
9. Webster College was founded in 1965 in Nashua, New Hampshire, as the New
England Aeronautical Institute (the “NEAI”). In 1978, the NEAI was merged with its junior-
college division to form Webster College, a private institution with a focus on business
education.
10. The CUSO is a credit union service organization, formed by the independent and
separately owned and managed not-for-profit Participating Credit Unions, and administered by
Rochdale. The CUSO was formed in order to take part in a student loan program (the
“Program”), pursuant to which private, non-governmentally guaranteed student loans (the
“Loans”) were made to certain of the students enrolled in certain of the Debtors’ schools (the
“CUSO Borrowers”), to help them to fund their tuition and fees at those schools.
11. On or about February 20, 2009, the CUSO, ITT and others entered into various
agreements (as have been amended from time to time, the “Program Agreements”), through
which they specified the terms and conditions of the Program and of their respective roles in
connection therewith. Pursuant to the Program Agreements, the CUSO is now the owner of the
Loans.
12. Among the Program Agreements is the Risk Sharing Agreement between ITT and
the CUSO, dated as of February 20, 2009 (as has been amended from time to time, the “RSA”),
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pursuant to which, inter alia, ITT guaranteed to the CUSO the repayment of a portion of the
amount due and owing on non-performing Loans, once the amount charged off under the
Program Agreements in respect of non-performing Loans exceeded a certain threshold.
13. The CUSO asserts that that threshold amount has been exceeded, triggering ITT’s
guaranty obligations to the CUSO under the RSA. Pursuant to certain other Program
Agreements, ITT agreed to secure a portion of its guaranty obligations to the CUSO under the
RSA, and, accordingly, ITT deposited funds into Account No. XXXXX8776 (the “Collateral
Account”), a deposit account maintained with JPMorgan Chase Bank, NA (“Chase”), which has
a current balance of approximately $8.8 million.
14. On April 4, 2013, the CUSO issued to Chase and ITT a notice that the CUSO has
exclusive control over the Collateral Account. The Trustee has disputed the CUSO’s exclusive
control over the Collateral Account.
15. Certain governmental entities commenced investigations into the practices of
Debtors and Debtors’ former management and/or formally alleged that the Debtors and Debtors’
former management engaged in misconduct, including without limitation consumer fraud, in
connection with, among other things, the Program.
16. In September 2016, the Debtors closed their campuses and, on the Petition Date,
each of the Debtors filed a voluntary petition for relief under Chapter 7 of Title 11 of the United
States Code in the United States Bankruptcy Court for the Southern District of Indiana (the
“Bankruptcy Court”), which petitions are being jointly administered by the Bankruptcy Court
under Case No. 16-07207-JMC-7A (the “Bankruptcy Case”).
17. The CUSO asserts that ITT is indebted to the CUSO, and the CUSO has a claim
against the Debtors, for certain of the losses the CUSO has incurred, and will incur, in
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connection with the Program (the “CUSO’s Claim”), in the amount of $159,248,725.66, plus the
CUSO’s attorneys’ fees and costs. The CUSO’s Claim is substantially greater than the amount
of the funds in the Collateral Account, which constitutes the CUSO’s sole collateral for the
CUSO’s Claim.
18. On November 10, 2016, the CUSO moved for relief from the automatic
bankruptcy stay [ECF 608], seeking (inter alia) the release and payment to the CUSO of all
funds in the Collateral Account (the “Stay Relief Motion”), which Stay Relief Motion the
Trustee opposed.
19. On January 3, 2017, a class action adversary proceeding against the Debtors in the
Bankruptcy Case was filed on behalf of a class (the “Student Class”), putatively consisting of all
students, including the CUSO Borrowers, who were at any time enrolled in any of the
educational programs offered by the Debtors between January 1, 2006 and September 16, 2016
(the “Students”), in which proceeding the Student Class alleges, among other things, that the
Debtors engaged in misconduct, including without limitation consumer fraud, in connection with
the Program, and disputes the validity of the Loans.
20. On January 24, 2017, the CUSO filed proofs of claim (the “CUSO Proofs of
Claim”) against each of the Debtors for the CUSO’s claimed losses (claim numbers 359 (DWC),
436 (ESI) and 1775 (ITT)), which the CUSO asserts were calculated based upon accrued, and
then-current estimates of future, amounts owed by ITT to the CUSO.
21. On March 29, 2017, the CUSO voluntarily withdrew the Stay Relief Motion
without prejudice [ECF 1492].
22. On March 30, 2017, the Trustee filed a complaint in the Bankruptcy Case [Adv.
Pro. ECF 1] (the “Complaint”), thereby commencing Adversary Proceeding No. 17-50101 (the
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“Adversary Proceeding”), in which the Trustee alleged various claims against the CUSO Parties
and, as alleged in the Complaint, sought, inter alia, to: (a) avoid the Debtors’ obligations under
the RSA, including, without limitation, the CUSO’s claim to recover approximately $157 million
in payments allegedly due by the Debtors thereunder as of the Petition Date; (b) avoid and
recover from the CUSO Parties (as initial and/or subsequent transferees) approximately $42.6
million in payments that the Debtors’ former management caused the Debtors to make under the
RSA from 2011 through 2016; (c) avoid all liens, pledges and encumbrances that the Debtors’
former management caused the Debtors to grant to the CUSO pursuant to that certain “Security
Agreement,” dated as of February 20, 2009, between the CUSO and the Debtors; (d) avoid the
CUSO’s alleged lien with respect to the moneys deposited into the Collateral Account; (e) avoid
and recover from the CUSO Parties (as initial and/or subsequent transferees) approximately $7
million in payments that the Debtors’ former management caused the Debtors to make to the
CUSO Parties between November 2014 and June 2015 purportedly in lieu of posting additional
collateral under the RSA and/or Security Agreement; (f) avoid the Debtors’ obligations under
that certain “Financing Program Agreement,” dated as of February 20, 2009, between the CUSO
Parties and the Debtors; (g) avoid and recover approximately $8.764 million in funds that the
Debtors’ former management caused the Debtors to make available to the CUSO Parties under
the Financing Program Agreement to generate additional CUSO Loans; (h) avoid and recover all
payments that the Debtors’ former management caused the Debtors to make to Rochdale,
directly or indirectly (as an initial and/or subsequent transferee) in connection with the
conception, implementation and/or administration of the Program, including, without limitation,
any and all payments made to Rochdale, directly or indirectly, pursuant to that certain
“Management Services Agreement,” dated as of February 20, 2009 between the CUSO and
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Rochdale; (i) avoid and recover any other obligations that the Debtors’ former management
caused the Debtors to incur and/or transfers that the Debtors’ former management caused the
Debtors to make to any of the CUSO Parties, directly or indirectly (as initial and/or subsequent
transferees), in connection with the Program, including, without limitation, all membership fees
that the Debtors paid to one or more of the CUSO Parties, directly or indirectly (as initial and/or
subsequent transferees) on behalf of ITT’s students; and (b) recover all damages allegedly
sustained by the Debtors by reason of the CUSO Parties’ aiding and abetting of the Debtors’
former management’s breaches of fiduciary duty and/or fraud in connection with the conception,
implementation and continuation of the Program that contributed to the Debtors’ closure and
bankruptcy, including any liability the Debtors may have on account of the massive amount of
student loans for which the U.S. Department of Education, the Debtors’ former students or others
are seeking, or may seek, to hold the Debtors liable.
23. The CUSO Parties deny any fault, wrongdoing and liability in connection with
any claim alleged in the Complaint, and on May 31, 2017, moved to dismiss all counts in the
Complaint as to all of the CUSO Parties [ECF 20-24] (the “Motions To Dismiss”), which
Motions To Dismiss the Trustee opposed.
24. On January 3, 2018, the Trustee filed with the Bankruptcy Court, among other
things, a motion seeking class certification of the Student Class, and on January 25, 2018, the
Bankruptcy Court entered an order that, among other things, certified the Student Class.
25. The Trustee and the CUSO Parties have engaged in settlement discussions
regarding resolution of the Parties’ issues, claims and disputes, including without limitation any
and all issues, claims and disputes contained in, arising out of, relating to and/or in connection
with the Program, the Loans, the Program Agreements (including without limitation the RSA),
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the Collateral Account, the CUSO’s Claim, all arguments, assertions and allegations in the Stay
Relief Motion, the CUSO Proofs of Claim, the Complaint (including without limitation
allegations of transfers), the Adversary Proceeding and the Motions To Dismiss, and all
arguments, assertions and allegations made or invoked by or on behalf of the Students regarding
and in connection with the Loans and the Program (the “Disputes”).
26. The CUSO asserts that it has certain understandings with certain governmental
entities, pursuant to which, without objection from the Trustee, (a) in accordance with
procedures agreed upon by the CUSO with, and approved by, those governmental entities, (i) the
CUSO will be required to discontinue the collection of all outstanding Loans (with more than a
zero balance), both active and charged off, (ii) the CUSO will be required to make reasonable
efforts to return, to reverse or otherwise effectively to reject any payment on the Loans that it
may receive after the date of such discontinuance, and (iii) the consumer reporting agencies to
which the CUSO and the servicer of those Loans have reported information about those Loans
will be directed to delete the consumer trade lines associated with those Loans (the “Credit
Report Deletions”), and (b) the CUSO will apply to the Internal Revenue Service (the “IRS”) for
a ruling or other guidance, for all CUSO Borrowers of Loans as to which collection will be
discontinued, to the effect that the CUSO is not required to issue Form 1099’s to those CUSO
Borrowers (the “IRS Ruling”).
27. The CUSO and the Trustee have agreed that $127,844,857 (which constitutes a
15% reduction of the adjusted amount claimed by the CUSO) is a fair and reasonable amount to
be allowed as a general unsecured claim in resolution of the CUSO’s Claim, accounting for the
facts and circumstances (including without limitation the amounts owed by ITT to, and the
amounts collected by, the CUSO) both before and after the Petition Date.
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28. The Parties’ entry into this Settlement Agreement is premised on the
understanding that the CUSO will discontinue collection of the Loans, will direct the Credit
Report Deletions, and will apply to the IRS for the IRS Ruling.
29. Certain governmental entities have advised the Parties that they have determined
that the discontinuance of collection of the Loans, the direction of the Credit Report Deletions,
and the application to the IRS for the IRS Ruling, are all in the public interest.
30. The Trustee and the CUSO Parties agree that the proper and orderly
implementation of the process of discontinuance of collection of the Loans, and the application
to the IRS, will be burdensome, time consuming and costly.
31. Absent a settlement, resolution of the Disputes likely will involve the Debtors and
the CUSO Parties in complex, protracted and expensive litigation.
32. The Trustee and the CUSO Parties, having considered the facts and circumstances
relating to the Disputes, desire to avoid the burden, risks and expenses attendant to further
litigation of the Disputes, and to settle and to resolve, fully and finally, the Disputes, and to that
end, they have engaged in arms’ length settlement negotiations, have exchanged materials and
information, and have determined that the terms and conditions of the settlement as provided in
the proposed Settlement Agreement are desirable, fair, reasonable, adequate and within the range
of reasonable settlements.
33. As more specifically spelled out in the proposed Settlement Agreement, it
generally provides that:
a. The Settlement Agreement will not become effective until all of the following
conditions precedent have occurred: (i) all of the Parties have executed the Settlement Agreement; (ii) the Trustee and the CUSO Parties have agreed upon the language of the Motion, and the Motion has been served and filed in accordance with the Bankruptcy Code, Rules, S.D.Ind. B-2002-1(c) and the Order
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Establishing Certain Notice, Case Management and Administrative Procedures and Approve Proposed Form 309D (the “Case Management Procedures”) entered by the Bankruptcy Court on October 4, 2016 [Doc 220], including: (I) by serving the Motion on the Core Group, the Request for Notice List, and the Appearance List (all as defined in the Case Management Procedures), (II) by serving a Notice of Trustee’s Motion To Compromise and Settle Adversary Proceeding No. 17-50101 (substantially in the form annexed to the Settlement Agreement as Exhibit D) (the “Approval Motion Notice”) on all CUSO Borrowers, all Students who have opted out of the Student Class, and all creditors who have filed claims in the Bankruptcy Case, with the exception of those claims that have been disallowed as of the date of service of the Motion, (III) by serving the Motion on the Legal Services Center of Harvard Law School and Jenner & Block LLP, as class counsel for the Student Class, and (IV) by posting the Approval Motion Notice on the Rust Omni website for the Bankruptcy Case (https://omnimgt.com/ITT) and the website maintained by class counsel for the Student Class (https://predatorystudentlending.org/cases/itt/); (iii) the Bankruptcy Court has entered an order approving the Settlement Agreement substantially in the form of the Proposed Order, which order has become final and not appealable; and (iv) the CUSO’s above-referenced understandings with certain governmental entities, as referenced in the Settlement Agreement, have become effective, and the CUSO Parties have received releases, acceptable to the CUSO Parties, from those governmental entities.
b. Within 5 days after the Effective Date of the Settlement Agreement, the Trustee and the CUSO will deliver a joint letter to Chase that, among other things, directs Chase to pay $7,521,625.00 from the Collateral Account to the Trustee; to pay the balance of the funds in the Collateral Account to the CUSO; and, thereafter, to close the Collateral Account.
c. Within 5 days after the Effective Date, the Trustee will file with the Bankruptcy Court a joint stipulation dismissing the Adversary Proceeding with prejudice.
d. The CUSO will have an allowed general unsecured claim in the amount of $127,844,857 (which constitutes a 15% reduction of the amount claimed by the CUSO, as adjusted) against each of the Debtors in the Bankruptcy Case, which claim will not be subject to challenge or objection and will receive treatment pari passu with all other allowed general unsecured claims.
e. The Trustee will not attempt, directly or indirectly, to service, to enforce or to collect the Loans, and irrevocably delegates to the CUSO, and waives and relinquishes, any right, authority or power, if any, she may have with respect to the Loans and the servicing and collection of the Loans. The Trustee acknowledges that the CUSO has the full right, authority and power to discontinue the collection of all outstanding Loans and to direct the Credit Report Deletions, and consents to the CUSO doing so.
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f. Except for the rights, claims, duties and obligations created by the Settlement Agreement, the Trustee, in her capacity as defined above and also including without limitation on behalf of each of the Debtors, and the Debtors’ professionals, agents, affiliates and creditors (e.g., the Students) (the “Debtor-Releasing Parties”), releases and discharges the CUSO Parties and their respective professionals, agents and affiliates, from any and all manner of actual, potential or alleged claims, litigations, actions, causes of action, defenses, rights of setoff, demands, suits, arbitrations, debts, obligations, damages (compensatory, punitive or otherwise), liabilities, losses, costs, expenses, attorneys’ fees, controversies, accounts and liens of every kind or nature whatsoever, whether asserted or unasserted, known or unknown, suspected or unsuspected, fixed or contingent, statutory, common law, in contract, tort or otherwise, secured or unsecured, accrued or unaccrued, direct, derivative, or brought in any other capacity, that the Debtor-Releasing Parties ever had, may now or may hereafter have, arising from the beginning of time to the Effective Date, against any or all of the released parties that arise out of, relate to or are in connection with the Disputes.
g. Except for the rights, clams duties and obligations created by the Settlement Agreement, and except for the CUSO’s rights as set forth in (d) above, the CUSO Parties, on behalf of themselves and their respective professionals, agents and affiliates, release and discharge the Trustee, the Debtors, and the Debtors’ professionals, agents, affiliates and creditors (e.g., the Students), from any and all manner of actual, potential or alleged claims, litigations, actions, causes of action, defenses, rights of setoff, demands, suits, arbitrations, debts, obligations, damages (compensatory, punitive or otherwise), liabilities, losses, costs, expenses, attorneys’ fees, controversies, accounts and liens of every kind or nature whatsoever, whether asserted or unasserted, known or unknown, suspected or unsuspected, fixed or contingent, statutory, common law, in contract, tort or otherwise, secured or unsecured, accrued or unaccrued, direct, derivative, or brought in any other capacity, that the releasing parties ever had, may now or may hereafter have, arising from the beginning of time to the Effective Date, against any or all of the released parties that arise out of, relate to or are in connection with the Disputes.
h. The Trustee will take all reasonable steps to secure from the Bankruptcy Court a final and non-appealable order permanently enjoining all Debtor-Releasing Parties from (i) commencing, conducting or continuing, directly or indirectly, any litigation, suit, arbitration, action or other proceeding against any of the CUSO Parties arising out of, relating to or in connection with the Loans or the Program, and (ii) enforcing (including without limitation by setoff, subrogation or recoupment), levying, attaching, collecting or otherwise recovering, directly or indirectly, any judgment, award, decree or order against any of the CUSO Parties that arises out of, relates to or is in connection with the Loans or the Program.
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Relief Requested
34. The Trustee requests entry of the final order, pursuant to sections 105(a) and 363
of the Bankruptcy Code and Bankruptcy Rule 9019, (a) approving the terms of the Settlement,
and (b) authorizing the Trustee to enter into the Settlement Agreement.
Basis for Relief
35. A court may authorize a trustee to enter into a settlement so long as it is a sound
exercise of the trustee’s business judgment. See 11 U.S.C. § 363(b); In re UAL Corp., 443 F.3d
565, 571 (7th Cir. 2006) (use under section 363 of the Bankruptcy Code must “[make] good
business sense”); In re Schipper, 933 F.2d 513, 515 (7th Cir. 1991) (section 363 sale involves
exercise of fiduciary duties and requires an “articulated business justification”); see also In re
500 (N.D. Ill. 2011). Moreover, when applying the “business judgment” standard to a use of
estate property under section 363, a trustee’s judgment is “entitled to great judicial deference as
long as a sound business reason is given.” See In re Efoora, Inc., 472 B.R. 481, 488 (Bankr.
N.D. Ill. 2012).
36. Similarly, Bankruptcy Rule 9019(a) permits a bankruptcy court to approve a
trustee’s “compromise or settlement” after notice and a hearing, if such settlement is “fair and
equitable . . . and in the best interests of the bankruptcy estate.” Depoister v. Mary M. Holloway
Found., 36 F.3d 582, 586 (7th Cir. 1994); see also In re Energy Co-op., Inc., 886 F.2d 921, 927
(7th Cir. 1989) (“The benchmark for determining the propriety of a bankruptcy settlement is
whether the settlement is in the best interests of the estate.”); In re Smith, No. 02-16450-JKC-7A,
2008 WL 4276171, at *2 (Bankr. S.D. Ind. Sept. 10, 2008) (same). Settlements should be
approved unless “the settlement ‘falls below the lowest point in the range of reasonableness.’”
In re Commercial Loan Corp., 316 B.R. 690, 698 (Bankr. N.D. Ill. 2004) (quoting Energy Co-
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op., 886 F.2d at 929); In re Doctors Hosp. of Hyde Park, Inc., 474 F.3d 421, 426 (7th Cir. 2007);
see also In re Artra Grp., Inc., 300 B.R. 699, 702 (Bankr. N.D. Ill. 2003). Settlements and
compromises are favored in bankruptcy because they expedite case administration and reduce
unnecessary administrative costs. Fogel v. Zell, 221 F.3d 955, 960 (7th Cir. 2000). In
determining whether a compromise is in the best interests of the estate, the Court must compare
“the settlement’s terms with the litigation’s probable costs and probable benefits.” In re Am.
Reserve Corp., 841 F.2d 159, 161 (7th Cir. 1987); see also Doctors Hosp., 474 F.3d at 426
(“Among the factors the court considers are the litigation’s probability of success, complexity,
expense, inconvenience, and delay, including the possibility that disapproving the settlement will
cause wasting of assets.”) (internal quotation marks and citations omitted); Commercial Loan,
316 B.R. at 697 (holding that relevant factors a bankruptcy court should consider in approving a
settlement include “the litigation’s probability of success, its complexity, and its ‘attendant
expense, inconvenience and delay’” (quoting Am. Reserve Corp., 841 F.2d at 161)).
37. Here, the Trustee believes entry into the Settlement Agreement is in the best
interest of the Debtors’ estates and represents a sound exercise of her business judgment. The
various disputes between the Debtors, on the one hand, and the CUSO Parties, on the other, are
complex, and the outcome of the Adversary Proceeding is uncertain. Resolution of the
Adversary Proceeding, if litigated, has the potential to, and likely will, prove costly and time-
consuming to all Parties, and absent resolution of the issues covered by the Settlement
Agreements, costs associated therewith will continue to accrue. Entry into the Settlement
Agreement will resolve such issues consensually, bringing the Trustee and the Debtors another
step closer to resolution of the Debtors’ chapter 7 cases.
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38. For the foregoing reasons, the Trustee has determined, in the exercise of her
sound business judgment, that the Settlement Agreement is fair, equitable, in the best interest of
the Debtors’ estates, and well within the range of reasonableness for approval under Bankruptcy
Rule 9019(a). Accordingly, the Trustee respectfully submits that the Court should approve the
Settlement and the Trustee’s entry into the Settlement Agreement.
Notice
39. Pursuant to the Notice and the Case Management Procedures, the Trustee will
serve a copy of the Motion on the following (as defined in the Case Management Procedures):
(a) the Core Group; (b) the Request for Notice List; (c) the Appearance List; and (d) the Legal
Services Center of Harvard Law School and Jenner & Block LLP, as class counsel for the
Student Class.
40. Furthermore, the Trustee shall serve the Notice of Trustee’s Motion to
Compromise and Settle Adversary Proceeding No. 17-50101 (the “Approval Motion Notice”)
(Exhibit B hereto) to all CUSO Borrowers, all Students who have opted out of the Student Class,
and all creditors who have filed claims in the Bankruptcy Case, with the exception of those
claims that have been disallowed as of the date of service of the Motion. In addition, the Trustee
shall post the Approval Motion Notice on the Rust Omni website for the Bankruptcy Case
(https://omnimgt.com/ITT) and the website maintained by class counsel for the Student Class
(https://predatorystudentlending.org/cases/itt/).
NOTICE IS GIVEN, that pursuant to the Case Management Procedures, any objection to this motion must be in writing and filed with the Bankruptcy Clerk by no later than 4:00 p.m. (prevailing Eastern Time) on June 5, 2019. Those not required or not permitted to file electronically must deliver any objection by U.S. mail, courier, overnight/express mail or in person at:
116 U.S. Courthouse 46 East Ohio Street Indianapolis, IN 46204
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The objecting party must also serve a copy of the written objection upon the Trustee’s counsel, at Counsel for Trustee Deborah J. Caruso, Rubin & Levin, P.C., 135 N. Pennsylvania Street, Suite 1400, Indianapolis, IN 46204. If an objection is NOT timely filed, the requested relief may be granted without a hearing.
NOTICE IS FURTHER GIVEN that in the event an objection to this motion is timely filed, a hearing on this motion and such objection will be conducted on June 12, 2019 at 1:30 p.m. (prevailing Eastern time), in Room 325 of the United States Courthouse, 46 East Ohio Street, Indianapolis, IN 46204.
[Remainder of Page Intentionally Left Blank]
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WHEREFORE, the Trustee respectfully requests entry of the final order, substantially in
the form attached hereto as Exhibit A, granting the relief requested herein and granting such
other relief as is just and proper.
Dated: May 7, 2019
Indianapolis, Indiana Respectfully submitted,
/s/ Jeff J. Marwil Jeff J. Marwil (admitted pro hac vice) PROSKAUER ROSE LLP 70 West Madison, Suite 3800 Chicago, Illinois 60602-4342 Telephone: (312) 962-3550 Facsimile: (312) 962-3551
–and–
Timothy Q. Karcher (admitted pro hac vice) Steven H. Holinstat PROSKAUER ROSE LLP Eleven Times Square New York, New York 10036 Telephone: (212) 969-3000 Facsimile: (212) 969-2900
/s/ Deborah J. Caruso Deborah J. Caruso (Atty. No. 4273-49) John C. Hoard (Atty. No. 8024-49) James E. Rossow Jr. (Atty. No. 21063-29) Meredith R. Theisen (Atty. No. 28804-49) RUBIN & LEVIN, P.C. 135 N. Pennsylvania Street, Suite 1400 Indianapolis, Indiana 46204 Telephone: (317) 634-0300 Facsimile: (317) 263-9411 Co-counsel to the Trustee
Co-counsel to the Trustee
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I further certify that on May 7, 2019, pursuant to Section IV.C.3(c) of the Case Management Procedures, a copy of the foregoing Trustee’s Motion to Compromise and Settle Adversary Proceeding No. 17-50101 was emailed to the following: Arlington ISD/Richardson ISD: Eboney Cobb at [email protected] CEC Red Run, LLC: Alan M. Grochal at [email protected] SWRE Deal V Building, LLC: Paul Weiser at [email protected] Tarrant County/Dallas County: Elizabeth Weller at [email protected] Northwest Natural Gas Company: Ashlee Minty at [email protected] Solar Drive Business, LLC: Chris W. Halling at [email protected] Market-Turk Company: Jordan A. Lavinsky at [email protected] Taxing Authority for Harris County, Texas: John P. Dillman at [email protected] Texas Comptroller of Public Accounts: Rachel Obaldo at [email protected] Clear Creek Independent School District: Carl O. Sandin at [email protected] Synchrony Bank: Recovery Management Systems Corporation at [email protected] Bexar County: Don Stecker at [email protected] SWRE Deal V Building, LLC: Nancy K. Swift at [email protected] TN Dept. of Revenue: Michael Willey at [email protected] Florida Department of Education: Benman D. Szeto at [email protected] Last Second Media, Inc.: T. Todd Egland at [email protected] Hung Duong: Kevin Schwin at [email protected] Travis County: Kay D. Brock at [email protected] Able Building Maintenance: Scott D. Fink at [email protected] Marathon Ventures, LLC: Daniel M. Karger at [email protected] Oklahoma County Treasurer: Tammy Jones at [email protected] JM Partners LLC: John Marshall at [email protected] /s/ Deborah J. Caruso Deborah J. Caruso G:\WP80\TRUSTEE\Caruso\ITT Educational - 86723901\Drafts\CUSO settlement motion - final.docx
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Exhibit A
PROPOSED FINAL APPROVAL ORDER
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UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION IN RE: ) ) ITT EDUCATIONAL SERVICES, INC., et al.,1 ) Case No. 16-07207-JMC-7A ) Debtors. ) Jointly Administered
ORDER GRANTING TRUSTEE’S MOTION TO
COMPROMISE AND SETTLE ADVERSARY PROCEEDING NO. 17-50101
Upon the motion (the “Motion”) [Doc No ___] of Deborah J. Caruso, not individually but
solely in her capacity as Chapter 7 trustee in the above-captioned case for the bankruptcy estates of
the Debtors, and acting for and on behalf of the Debtors and each of the Debtors’ respective
bankruptcy estates (the “Trustee”), for entry of an Order (a) approving the proposed settlement
agreement by and between the Trustee, on the one hand, and Student CU Connect CUSO, LLC (the
“CUSO”), The Rochdale Group, Inc., Elements Financial Federal Credit Union (formerly known as
1 The debtors in these cases, along with the last four digits of their respective federal tax identification numbers, are ITT Educational Services, Inc. [1311]; ESI Service Corp. [2117]; and Daniel Webster College, Inc. [5980] (the “Debtors”).
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Eli Lilly Federal Credit Union), Bellco Credit Union, Credit Union of America, Directions Credit
Union, Veridian Credit Union, Workers Credit Union and CommunityAmerica Credit Union
(together with the CUSO, the “CUSO Parties”), on the other hand (the “Settlement Agreement,” a
copy of which is annexed hereto as Exhibit 1), and (b) granting certain other relief, as more fully set
forth herein;
The Court, having considered the Motion, being otherwise duly advised in the
circumstances, and after due deliberation and consideration of the record in the above-captioned
Chapter 7 case (the “Chapter 7 Case”) and in Adversary Proceeding No. 17-50101 (the “Adversary
Proceeding”), and of the hearing on the Motion, determines that the Motion should be, and hereby
is, GRANTED.
Accordingly, IT IS HEREBY ORDERED as follows:
1. The Motion is granted in its entirety.
2. The Trustee is authorized and directed to take all actions required under the
Settlement Agreement and all such actions are hereby approved.
3. Pursuant to the standards set forth under Rule 9019 of the Federal Rules of
Bankruptcy Procedure, the Court finds that the proposed Settlement Agreement is fair, reasonable,
adequate and within the range of reasonable settlements.
4. The CUSO’s claim against the Debtors, in the amount of $150,083,040, subject to
adjustment [Proofs of Claim numbers 359 (DWC), 436 (ESI) and 1775 (ITT)], is hereby allowed in
the reduced amount of $127,844,857 as a prepetition, general, unsecured claim no longer subject to
objection or challenge, and shall receive treatment pari passu with all other allowed general unsecured
claims. The Trustee’s claims agent promptly shall revise the claims registers to reflect the
modification of the CUSO’s proofs of claims and the amount and allowance of the CUSO’s claim as
provided herein. Any distribution in respect of this claim shall be made to “Foley & Lardner LLP,
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as counsel for Student CU Connect CUSO, LLC,” and shall be delivered in immediately payable
funds to Foley & Lardner LLP, 90 Park Avenue, New York, New York 10016, Attention: Susan J.
Schwartz, Esq.
5. Within five (5) days after the Effective Date of the Settlement Agreement (as defined
therein), the Trustee shall file, in the Chapter 7 Case and the Adversary Proceeding, a notice of the
occurrence and date of the Effective Date.
6. Within five (5) days after the Effective Date, the Trustee and the CUSO Parties shall
file a stipulation dismissing the Adversary Proceeding with prejudice.
7. As of the Effective Date, the Trustee, each of the Debtors and each of the Debtors’
respective bankruptcy estates and past, present or future, direct or indirect, affiliates, divisions,
subsidiaries, general partners, limited partners, equity holders, shareholders, creditors (including
without limitation all students who were enrolled in any of the educational programs offered by the
Debtors between January 1, 2006 and September 16, 2016 (the “Students”), officers, directors,
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Exhibit 2
APPROVAL ORDER NOTICE
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UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION IN RE: ) ) ITT EDUCATIONAL SERVICES, INC., et al.,1 ) Case No. 16-07207-JMC-7A ) Debtors. ) Jointly Administered
NOTICE OF ORDER GRANTING TRUSTEE’S MOTION TO COMPROMISE AND SETTLE ADVERSARY PROCEEDING NO. 17-50101
PLEASE TAKE NOTICE that on June ___, 2019, the Court entered an Order Granting Trustee’s Motion To Compromise and Settle Adversary Proceeding No. 17-50101 (the “Order”) [Doc ___]. The Order approves, pursuant to 11 U.S.C. §§ 105(a) and 363 and Rule 9019 of the Federal Rules of Bankruptcy Procedure, the terms of a proposed settlement by and between Deborah J. Caruso, the chapter 7 trustee in this case (the “Trustee”), not individually but solely in her capacity as Chapter 7 trustee for, and acting for and on behalf of, the Debtors, and each of the Debtors’ respective bankruptcy estates, on the one hand, and Student CU Connect CUSO, LLC, The Rochdale Group, Inc., Elements Financial Federal Credit Union (formerly known as Eli Lilly Federal Credit Union), Bellco Credit Union, Credit Union of America, Directions Credit Union, Veridian Credit Union, Workers Credit Union and CommunityAmerica Credit Union, on the other hand, which settlement is embodied in a certain settlement agreement (the “Settlement Agreement”), a copy of which was attached to the Trustee’s Motion To Compromise and Settle Adversary Proceeding No. 17-50101 (the “Motion”). A copy of the Order and the Motion, which includes the Settlement Agreement, may be accessed through the case website at: https://omnimgt.com/ITT and the website maintained by class counsel for the Student Class at: https://predatorystudentlending.org/cases/itt/. Dated: June ___, 2019
Indianapolis, Indiana
/s/ Jeff J. Marwil
Respectfully submitted,
/s/ Deborah J. Caruso
Jeff J. Marwil (admitted pro hac vice) PROSKAUER ROSE LLP 70 West Madison, Suite 3800 Chicago, Illinois 60602-4342 Telephone: (312) 962-3550 Facsimile: (312) 962-3551
Deborah J. Caruso (Atty. No. 4273-49) John C. Hoard (Atty. No. 8024-49) James E. Rossow Jr. (Atty. No. 21063-29) Meredith R. Theisen (Atty. No. 28804-49) RUBIN & LEVIN, P.C. 135 N. Pennsylvania Street, Suite 1400 Indianapolis, Indiana 46204
1 The debtors in these cases, along with the last four digits of their respective federal tax identification numbers, are ITT Educational Services, Inc. [1311]; ESI Service Corp. [2117]; and Daniel Webster College, Inc. [5980] (the “Debtors”).
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–and– Timothy Q. Karcher (admitted pro hac vice) Steven H. Holinstat PROSKAUER ROSE LLP Eleven Times Square New York, New York 10036 Telephone: (212) 969-3000 Facsimile: (212) 969-2900
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Exhibit B
NOTICE OF TRUSTEE’S MOTION TO COMPROMISE AND SETTLE ADVERSARY PROCEEDING NO. 17-50101
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UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION IN RE: ) ) ITT EDUCATIONAL SERVICES, INC., et al.,1 ) Case No. 16-07207-JMC-7A ) Debtors. ) Jointly Administered
NOTICE OF TRUSTEE’S MOTION TO COMPROMISE AND SETTLE ADVERSARY PROCEEDING NO. 17-50101
PLEASE TAKE NOTICE that on _________, 2019, Deborah J. Caruso, the chapter 7 trustee in this case (the “Trustee”), filed the Trustee’s Motion To Compromise and Settle Adversary Proceeding No. 17-50101 (the “Motion”) [Doc ___]. The Motion requests entry of an order, pursuant to 11 U.S.C. §§ 105(a) and 363 and Rule 9019 of the Federal Rules of Bankruptcy Procedure, approving the terms of a proposed settlement by and between the Trustee, not individually but solely in her capacity as Chapter 7 trustee for, and acting for and on behalf of, the Debtors, and each of the Debtors’ respective bankruptcy estates, on the one hand, and Student CU Connect CUSO, LLC, The Rochdale Group, Inc., Elements Financial Federal Credit Union (formerly known as Eli Lilly Federal Credit Union), Bellco Credit Union, Credit Union of America, Directions Credit Union, Veridian Credit Union, Workers Credit Union and CommunityAmerica Credit Union, on the other hand, which settlement is embodied in a certain settlement agreement, a copy of which is attached to the Motion (the “Settlement Agreement”).2 A copy of the Motion, which includes the Settlement Agreement, may be accessed through the case website at: https://omnimgt.com/ITT, and through the website maintained by class counsel for the Student Class at: https://predatorystudentlending.org/cases/itt/. The Settlement Agreement generally provides as follows:
a. The Settlement Agreement will not become effective until all of the following conditions precedent have occurred: (i) all of the Parties have executed the Settlement Agreement; (ii) the Trustee and the CUSO Parties have agreed upon the language of the Motion, and the Motion has been served and filed in accordance with the Bankruptcy Code, Rules, S.D.Ind. B-2002-1(c) and the Case Management Procedures, including: (I) by serving the Motion on the Core Group, the Request for Notice List, and the Appearance List (all as defined in the Case Management Procedures), (II) by serving this notice on all CUSO Borrowers, all Students who have opted out of the Student Class, and all creditors who have filed claims in the Bankruptcy Case, with the exception of those claims that have been
1 The debtors in these cases, along with the last four digits of their respective federal tax identification numbers, are ITT Educational Services, Inc. [1311]; ESI Service Corp. [2117]; and Daniel Webster College, Inc. [5980] (the “Debtors”).
2 Capitalized terms used but not otherwise defined herein shall have the meanings used in the Settlement Agreement.
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disallowed as of the date of service of the Motion, (III) by serving the Motion on the Legal Services Center of Harvard Law School and Jenner & Block LLP, as class counsel for the Student Class, and (IV) by posting this notice on the Rust Omni website for the Bankruptcy Case (https://omnimgt.com/ITT) and the website maintained by class counsel for the Student Class (https://predatorystudentlending.org/cases/itt/); (iii) the Bankruptcy Court has entered an order approving the Settlement Agreement substantially in the form of the proposed order, which order has become final and not appealable; and (iv) the CUSO’s understandings with certain governmental entities, as referenced in the Settlement Agreement, have become effective, and the CUSO Parties have received releases, acceptable to the CUSO Parties, from those governmental entities.
b. Within 5 days after the Effective Date of the Settlement Agreement, the Trustee and the CUSO will deliver a joint letter to Chase that, among other things, directs Chase to pay $7,521,625.00 from the Collateral Account to the Trustee; to pay the balance of the funds in the Collateral Account to the CUSO; and, thereafter, to close the Collateral Account.
c. Within 5 days after the Effective Date, the Trustee will file with the Bankruptcy Court a joint stipulation dismissing the Adversary Proceeding with prejudice.
d. The CUSO will have an allowed general unsecured claim in the amount of $127,844,857 (which constitutes a 15% reduction of the amount claimed by the CUSO, as adjusted) against each of the Debtors in the Bankruptcy Case, which claim will not be subject to challenge or objection and will receive treatment pari passu with all other allowed general unsecured claims.
e. The Trustee will not attempt, directly or indirectly, to service, to enforce or to collect the Loans, and irrevocably delegates to the CUSO, and waives and relinquishes, any right, authority or power, if any, she may have with respect to the Loans and the servicing and collection of the Loans. The Trustee acknowledges that the CUSO has the full right, authority and power to discontinue the collection of all outstanding Loans and to direct the Credit Report Deletions, and consents to the CUSO doing so.
f. Except for the rights, claims, duties and obligations created by the Settlement Agreement, the Trustee, in her capacity as defined above and also including without limitation on behalf of each of the Debtors, and the Debtors’ professionals, agents, affiliates and creditors (e.g., the Students) (the “Debtor-Releasing Parties”), releases and discharges the CUSO Parties and their respective professionals, agents and affiliates, from any and all manner of actual, potential or alleged claims, litigations, actions, causes of action, defenses, rights of setoff, demands, suits, arbitrations, debts, obligations, damages (compensatory, punitive or otherwise), liabilities, losses, costs, expenses, attorneys’ fees, controversies, accounts and liens of every kind or nature whatsoever, whether asserted or unasserted, known or unknown, suspected or unsuspected, fixed or contingent,
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statutory, common law, in contract, tort or otherwise, secured or unsecured, accrued or unaccrued, direct, derivative, or brought in any other capacity, that the Debtor-Releasing Parties ever had, may now or may hereafter have, arising from the beginning of time to the Effective Date, against any or all of the released parties that arise out of, relate to or are in connection with the Disputes.
g. Except for the rights, clams duties and obligations created by the Settlement Agreement, and except for the CUSO’s rights as set forth in (d) above, the CUSO Parties, on behalf of themselves and their respective professionals, agents and affiliates, release and discharge the Trustee, the Debtors, and the Debtors’ professionals, agents, affiliates and creditors (e.g., the Students), from any and all manner of actual, potential or alleged claims, litigations, actions, causes of action, defenses, rights of setoff, demands, suits, arbitrations, debts, obligations, damages (compensatory, punitive or otherwise), liabilities, losses, costs, expenses, attorneys’ fees, controversies, accounts and liens of every kind or nature whatsoever, whether asserted or unasserted, known or unknown, suspected or unsuspected, fixed or contingent, statutory, common law, in contract, tort or otherwise, secured or unsecured, accrued or unaccrued, direct, derivative, or brought in any other capacity, that the releasing parties ever had, may now or may hereafter have, arising from the beginning of time to the Effective Date, against any or all of the released parties that arise out of, relate to or are in connection with the Disputes.
h. The Trustee will take all reasonable steps to secure from the Bankruptcy Court a final and non-appealable order permanently enjoining all Debtor-Releasing Parties from (i) commencing, conducting or continuing, directly or indirectly, any litigation, suit, arbitration, action or other proceeding against any of the CUSO Parties arising out of, relating to or in connection with the Loans or the Program, and (ii) enforcing (including without limitation by setoff, subrogation or recoupment), levying, attaching, collecting or otherwise recovering, directly or indirectly, any judgment, award, decree or order against any of the CUSO Parties that arises out of, relates to or is in connection with the Loans or the Program.
NOTICE IS GIVEN that, pursuant to the Order Establishing Certain Notice, Case Management and Administrative Procedures and Approve Proposed Form 309D (the “Case Management Procedures”) [Doc 220], any objection to the Motion must be in writing and filed with the Bankruptcy Clerk by no later than 4:00 p.m. (prevailing Eastern time) on June 5, 2019. Those not required or not permitted to file electronically must deliver any objection by U.S. mail, courier, overnight/express mail or in person at:
116 U.S. Courthouse 46 East Ohio Street Indianapolis, IN 46204
The objecting party must also serve a copy of the written objection upon the Trustee’s counsel, at Counsel for Trustee Deborah J. Caruso, Rubin & Levin, P.C., 135 N. Pennsylvania Street, Suite
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4
1400, Indianapolis, IN 46204. If an objection is NOT timely filed, the requested relief may be granted without a hearing.
NOTICE IS FURTHER GIVEN that in the event an objection to the Motion is timely filed, a hearing will be conducted on June 12, 2019 at 1:30 p.m. (prevailing Eastern time), in Room 325 of the United States Courthouse, 46 East Ohio Street, Indianapolis, IN 46204.
Dated: ___, 2019 Indianapolis, Indiana
/s/ Jeff J. Marwil
Respectfully submitted, /s/ Deborah J. Caruso
Jeff J. Marwil (admitted pro hac vice) PROSKAUER ROSE LLP 70 West Madison, Suite 3800 Chicago, Illinois 60602-4342 Telephone: (312) 962-3550 Facsimile: (312) 962-3551 –and–
Timothy Q. Karcher (admitted pro hac vice) Steven H. Holinstat PROSKAUER ROSE LLP Eleven Times Square New York, New York 10036 Telephone: (212) 969-3000 Facsimile: (212) 969-2900
Deborah J. Caruso (Atty. No. 4273-49) John C. Hoard (Atty. No. 8024-49) James E. Rossow Jr. (Atty. No. 21063-29) Meredith R. Theisen (Atty. No. 28804-49) RUBIN & LEVIN, P.C. 135 N. Pennsylvania Street, Suite 1400 Indianapolis, Indiana 46204 Telephone: (317) 634-0300 Facsimile: (317) 263-9411
Co-counsel to the Trustee
Co-counsel to the Trustee
Case 16-07207-JMC-7A Doc 3391-2 Filed 05/07/19 EOD 05/07/19 14:19:34 Pg 5 of 5