Case mkn Doc 694 Entered 10/03/12 15:44:12 Page 1 of UNITED STATES BANKRUPTCY COURT

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1 Case mkn Doc 694 Entered 10/03/12 15:44:12 Page 1 of UNITED STATES BANKRUPTCY COURT 2 DISTRICT OF NEVADA 3 LAS VEGAS, NEVADA 4 In re: AMERICAN WEST DEVELOPMENT, ) E-Filed: 10/03/12 INC., ) 5 ) Debtor. ) Case No. 6 ) BK-S MKN ) Chapter TRANSCRIPT OF PROCEEDINGS OF 12 ORAL RULING RE: CONFIRMATION HEARING 13 REGARDING CHAPTER 11 PLAN OF REORGANIZATION NO. 1, NO. 263 VOLUME 1 14 BEFORE THE HONORABLE MIKE K. NAKAGAWA UNITED STATES BANKRUPTCY JUDGE 15 Thursday, September 27, :30 a.m Court Recorder: Sharon Johnson 24 Proceedings recorded by electronic sound recording; 25 transcript produced by transcription service.

2 Case mkn Doc 694 Entered 10/03/12 15:44:12 Page 2 of APPEARANCES: 2 For the Debtor: BRETT A. AXELROD, ESQ. Fox Rothschild, LLP Howard Hughes Parkway Suite Las Vegas, Nevada For the United States ANTHANASIOS E. AGELAKOPOULOS, ESQ. Trustee: Department of Justice 6 Office of the United States Trustee 300 Las Vegas Boulevard South 7 Suite 4300 Las Vegas, Nevada For James Moore: MITCHELL D. STIPP, ESQ. 9 Field Law, Ltd West Flamingo Road 10 Suite Las Vegas, Nevada For California DONALD F. ENNIS, ESQ. 12 Bank & Trust: Snell & Wilmer, LLP One Arizona Center East Van Buren Street Suite Phoenix, Arizona (Telephonic)

3 Case mkn Doc 694 Entered 10/03/12 15:44:12 Page 3 of (Court convened at 09:34:11 a.m.) 2 THE CLERK: Court is now in session. 3 THE COURT: Please be seated. 4 (Colloquy not on the record.) 5 THE COURT: We're here on the matter of 6 American West Development, Inc. 7 May I have appearances for the record. 8 MS. AXELROD: Brett Axelrod for American West. 9 THE COURT: Okay. 10 MR. AGELAKOPOULOS: Good morning, your Honor. May it 11 please the Court, Athanasios Agelakopoulos, United States 12 Department of Justice, Office of the U.S. Trustee. 13 THE COURT: All right. 14 MR. STIPP: Mitchell Stipp, Field Law, on behalf of 15 James Moore, future-claims representative. 16 THE COURT: Okay. We have appearances by telephone. 17 Do we have any appearances by telephone in the 18 American West Development matter? 19 COURT CALL OPERATOR: The attorney is live, 20 your Honor. 21 THE COURT: All right. Do we have any appearances by 22 telephone in the American West matter? 23 MR. ENNIS: Good morning, your Honor. Can you hear 24 me? 25 THE COURT: Yes. Can you state your name --

4 Case mkn Doc 694 Entered 10/03/12 15:44:12 Page 4 of MR. ENNIS: Okay. 2 THE COURT: -- please. 3 MR. ENNIS: I'm sorry. Donald Ennis of 4 Snell & Wilmer on behalf California Bank & Trust. 5 THE COURT: All right. Thank you. 6 This matter is on today's calendar for the Court's oral 7 ruling on the matter of plan confirmation. The following 8 constitutes the Court's findings of fact and conclusions of law 9 issued pursuant to Bankruptcy Rule 7052 and Rule 52 of the 10 Federal Rules of Civil Procedure: 11 A hearing on plan confirmation was held on 12 September 25, For the reasons stated in this oral 13 ruling, the objections presented by the Office of the 14 United States Trustee will be sustained and the confirmation of 15 the proposed plan will be denied. 16 Denial, however, will be without prejudice to the debtor's 17 submission of a subsequent plan and disclosure statement in the 18 case. 19 This Chapter 11 proceeding was commenced on March 1, A proposed plan of reorganization was filed by the debtor on 21 May 29, 2012, along with a proposed master disclosure statement 22 and homeowner disclosure statement. 23 On July 16, 2012, the Court entered an order approving the 24 adequacy of both disclosure statements under Section 1125(a) of 25 the bankruptcy code and scheduled a hearing on plan

5 Case mkn Doc 694 Entered 10/03/12 15:44:12 Page 5 of confirmation for September 25, That order also set appropriate deadlines for ballots to 3 be returned, confirmation objections to be filed, and responses 4 to be submitted. 5 In this case, confirmation objections were filed by 6 Zurich American Insurance Company, the Internal Revenue 7 Service, and the Office of the United States Trustee. 8 Prior to the confirmation hearing, the objections by 9 Zurich American Insurance and the Internal Revenue Service were 10 resolved. The objection by the United States Trustee, however, 11 was not. 12 The United States Trustee requested that the Court take 13 judicial notice of the pleadings and documents filed in the 14 case pursuant to Federal Rule of Evidence 2001, and the Court 15 grants that request. 16 At the confirmation hearing, counsel for the debtors also 17 identified at the U.S. Trustee's request the various matters on 18 file which the debtors specifically rely on to support 19 confirmation. 20 Included in those documents are the declaration of 21 Robert Evans dated May 29, 2012, the declaration of James Moore 22 dated September 18, 2012, and, also, the ballot-summary 23 declaration of Jeffrey Stein dated September 19, At the hearing in this matter, counsel for the 25 United States Trustee examined under oath both Messrs. Evans

6 Case mkn Doc 694 Entered 10/03/12 15:44:12 Page 6 of and Moore concerning the testimony contained in their 2 respective declarations. 3 The United States Trustee objects to plan confirmation 4 primarily on four grounds. First, that the debtor is filing of 5 a plan supplement on September 14, 2012, as well as an 6 amendment to that supplement on September 24, 2012, violates 7 the disclosure requirements of Section 1125(a) of the 8 bankruptcy code as well as the confirmation requirements 9 embodied in Section 1129(a)(2). 10 Second, the U.S. Trustee objects that the plan fails to 11 treat potential postpetition, preconfirmation 12 construction-defect claims as potential administrative claims 13 under Section 1129(a)(9). 14 Third, the U.S. Trustee objects that Section 12.2, 12.3, , and 12.5 of the proposed plan violates Section 524(e) of 16 the bankruptcy code, and, therefore, the plan does not meet the 17 requirements of Section 1129(a)(1). 18 And, finally, four, the U.S. Trustee objects that the 19 release of the future-claims representative, Mr. Moore, 20 provided in Sections 12.3 and 12.4 of the plan also violates 21 Section 524(e). 22 The Court having considered the written and oral arguments 23 of the parties together with the evidence presented and the 24 record before the Court concludes as follows: 25 First, the disclosure requirement has not been met as to

7 Case mkn Doc 694 Entered 10/03/12 15:44:12 Page 7 of Class 4 claimants. The July 16, 2012, order approving the 2 master disclosure statement and homeowner disclosure statement 3 took into account the various terms and requirements as defined 4 in the proposed plan. 5 The July 16 order set September 11, 2012, as the deadline 6 for parties in interest to object to plan confirmation as well 7 as to cast ballots on whether to accept or reject the plan. 8 The order also specifically provided that the debtor can 9 file a supplement to the plan no later than September 14, Debtor timely filed the plan supplement on September 14, 2012, 11 and the amendment to that supplement on September 24, It does not appear, however, that the information 13 contained in the plan supplement or the amendment may have 14 affected the ballots cast of the parties simply because the 15 ballot deadline was before the deadline for filing the 16 supplements. 17 The record also reflects that no party in interest ever 18 objected to the debtor's request to allow plan supplements to 19 be filed three days after the ballot deadline. 20 The point raised now by the United States Trustee, 21 however, is that the insurance policies that would be devoted 22 to the construction-defect trust under the plan contain 23 substantial self-insured retention requirements that vary by 24 policy year. 25 According to the United States Trustee, these requirements

8 Case mkn Doc 694 Entered 10/03/12 15:44:12 Page 8 of reduce the value of the policies as a source of funding for the 2 construction-defect trust and also raise concerns as to the 3 feasibility of the plan. 4 In other words, the United States Trustee questions 5 whether the debtor will ever be able to pay the self-insured 6 retentions before the policy coverage kicks in thereby 7 rendering the insurance coverage illusory. 8 Given the importance of the construction-defect trust to 9 the treatment of Class 4 construction-defect claims, the 10 United States Trustee underscores the importance of ensuring 11 that adequate information is provided regarding the funding of 12 the trust. 13 It is well-established that even if a disclosure statement 14 is approved under Section 1125(a) of the code the adequacy of a 15 plan proponent's disclosure may be revisited at plan 16 confirmation. 17 For an example of this, see the case of in re Michelson 18 reported at 141 Bankruptcy Reporter 715 at page 720 which is a 19 decision by the Bankruptcy Court for the Eastern District of 20 California in Adequacy and accuracy of disclosure in connection with 22 plan confirmation is, in fact, at the very heart of 23 Section 1144 as a provision for revocation of plan-confirmation 24 orders. 25 Because adequate disclosure is an ongoing requirement

9 Case mkn Doc 694 Entered 10/03/12 15:44:12 Page 9 of throughout the confirmation process, a, quote, "collateral 2 attack," close quote, on a disclosure-statement approval order 3 simply is not required. 4 Article Roman Numeral V, part D(2) of the master 5 disclosure statement prominently features the insurance 6 policies as being property of the construction-defect trust. 7 The Court has reviewed the debtor's original request for 8 approval of the master disclosure statement and homeowner 9 disclosure statement. 10 Nowhere in that request was the self-insured retention 11 requirement of the insurance policy mentioned or its potential 12 impact on the value of the policies. 13 The debtor clearly was aware of the self-insured retention 14 requirements because its initial draft of the 15 construction-defect trust set forth in Exhibit 4 to the 16 September 14 plan supplement contain language in Section that would have eliminated any obligation of the debtor to 18 satisfy the self-insured retention requirement. 19 Only after Zurich American Insurance objected to that 20 language did the debtor file the September 24 plan-supplement 21 amendment that included a revised Exhibit 4 that removed the 22 language eliminating the self-insured retention requirement. 23 Under these circumstances, the Court concludes that 24 the self-insured retention requirement of the 25 Zurich American Insurance policy constitutes information of a

10 Case mkn Doc 694 Entered 10/03/12 15:44:12 Page 10 of kind required for a hypothetical investor typical of the 2 Class 4 claimants to make an informed decision on whether to 3 accept or reject the plan. 4 Given that the information concerning the self-insured 5 retention requirement was not revealed until after the July 16 6 order was issued, the Court concludes that the disclosure 7 requirement embodied in Section 1129(a)(2) has not been met 8 with respect to the Class 4 claimants. 9 The next issue is whether under Section 2.2 of the plan 10 there is a continuing violation. Under Section 2.2 of the 11 plan, the bar date for filing administrative-expense claims is days after the effective date, the conditions of which are 13 specified in Article X of the plan. 14 Until a plan-confirmation order is entered, the day period does not even commence. The debtor maintains and 16 the Court agrees that any postpetition, preconfirmation 17 construction-defect claims that are asserted have not been 18 impermissibly barred by the plan. 19 Section 2.2 of the plan sufficiently provides for payment 20 of allowed administrative claims in compliance with 21 Section 1129(a)(9) of the bankruptcy code. That aspect, the 22 second issue raised by the United States Trustee, is rejected, 23 and that aspect is overruled. 24 With respect to the third basis for objection raised by 25 the Office of the United States Trustee, the Court notes that

11 Case mkn Doc 694 Entered 10/03/12 15:44:12 Page 11 of under Section 12.4(b) of the plan it contains certain 2 consensual release provisions with respect to nondebtor parties 3 that by themselves do not appear to be prohibited by the 4 bankruptcy code. 5 Section 12.5 of the plan, however, includes provisions for 6 injunctive relief that protect not only the debtor but 7 nondebtor parties as well. 8 The Court has denied confirmation of other proposed plans 9 of reorganization that include injunctive-relief provisions 10 protecting nondebtor guarantors based on current decisions in 11 this circuit. 12 See, for example, the Court's memorandum decision entered 13 March 2, 2012, as Docket No. 427 in the case of in re 14 Russell Boulder, LLC, which bears Case No The extent to which a bankruptcy court can enjoin 16 actions against nondebtor parties without running afoul of 17 Section 524(e) currently is before the Ninth Circuit 18 Court of Appeals in the case of Linda Vista Cinemas versus 19 Bank of America which bears Ninth Circuit Docket 20 Case No The underlying decision of the bankruptcy court denying 22 plan confirmation was reported at 442 Bankruptcy Reporter which was a decision out of the Bankruptcy Court for the 24 District of Arizona in None of the briefing offered by the debtor or any of

12 Case mkn Doc 694 Entered 10/03/12 15:44:12 Page 12 of the parties makes reference to the Linda Vista Cinema 2 cases. 3 The closing brief on appeal before the Ninth Circuit in 4 Linda Vista was filed on April 5, 2012, with supplemental 5 authorities filed on June 19, The decision in Linda Vista Cinemas will provide guidance 7 on the issues currently before this and many other courts in 8 the Ninth Circuit. 9 Under these circumstances, the Court concludes that 10 current authority in this circuit prohibits the type of 11 injunctive provisions contemplated by the current provision or 12 version of the proposed plan. 13 For that reason, the proposed plan fails to meet the 14 requirements of Section 1129(a)(1). And to that extent, this 15 part of the objection raised by the United States Trustee is 16 sustained. 17 As to the fourth basis for objection, under the 18 exculpation language of Section 12.3 of the plan, the 19 future-claims representative is relieved of liability for his 20 services as future-claims representative except to the extent 21 of any liability based on fraud, gross negligence, or willful 22 misconduct. This type of language is unremarkable and typical 23 of plans of this nature. 24 Section 12.5(b) of the plan, however, also enjoins actions 25 against the future-claims representative to the extent of the

13 Case mkn Doc 694 Entered 10/03/12 15:44:12 Page 13 of exculpation provided in Section Such an injunction may not be essential at all because 3 injunctive relief easily can be obtained to the extent that the 4 exculpation language is violated. 5 The exculpation language itself does not run afoul of 6 Section 1129(a)(1), but the injunction provisions of 7 Section 12.5(b) are impermissible under the current law in this 8 circuit. 9 For these reasons, confirmation of the debtor's proposed 10 Chapter 11 plan will be denied. The Court will direct and I do 11 direct Mr. Agelakopoulos to draft and circulate the appropriate 12 order denying confirmation incorporating by reference only the 13 Court's oral findings of fact and conclusions of law. 14 And I will further direct that a status conference will be 15 held in this proceeding on October 30, 2012, at 10:00 a.m., 16 pursuant to Section 105(d) of the bankruptcy code to consider 17 further proceedings in this matter. 18 Mr. Agelakopoulos, please prepare the order. 19 MR. AGELAKOPOULOS: Yes, your Honor. 20 THE COURT: And I assume, Ms. Axelrod, you'll want to 21 sign off on the order and review it as well, correct? 22 MS. AXELROD: Yes, your Honor. 23 THE COURT: All right. Are there any other parties 24 who want to sign off on the order? All right. 25 There being none, that concludes the 9:30 calendar.

14 Case mkn Doc 694 Entered 10/03/12 15:44:12 Page 14 of There being no further matters, court is adjourned. 2 THE CLERK: Thank you, your Honor. 3 All rise. 4 (Court concluded at 09:49:26 a.m.)

15 Case mkn Doc 694 Entered 10/03/12 15:44:12 Page 15 of I certify that the foregoing is a correct transcript 2 from the electronic sound recording of the proceedings in 3 the above-entitled matter /s/ Lisa L. Cline 10/03/12 7 Lisa L. Cline, Transcriptionist Date