PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT — ATTORNEY-CLIENT PRIVILEGE
CALDERWOOD & HARKNESS LLP Internal Memorandum
June 8, 2022
TO: Colette Whitman, Responsible Partner, Bankruptcy & Restructuring Nathaniel Bower, Billing Partner, Bankruptcy & Restructuring
FROM: Gabrielle Moss, Lead Associate, Bankruptcy & Restructuring Amy Chesterton, Working Associate, Bankruptcy & Restructuring
DATE: June 8, 2022
RE: Conflicts Analysis — Proposed Representation of Crestline Packaging Solutions LLC and CPS Holdings Inc. in Chapter 11 Prepackaged Plan of Reorganization; In re Crestline Packaging Solutions LLC, et al., U.S. Bankruptcy Court for the Northern District of Ohio (Eastern Division)
Matter No.: 1006-00002
I. PURPOSE AND EXECUTIVE SUMMARY
The purpose of this memorandum is to memorialize the results of the conflicts check conducted in connection with the proposed retention of Calderwood & Harkness LLP ("C&H" or the "Firm") as debtor's counsel to Crestline Packaging Solutions LLC ("Crestline" or "CPS") and CPS Holdings Inc. ("CPS Holdings" and, together with Crestline, the "Debtors") in connection with the anticipated filing of a prepackaged Chapter 11 plan of reorganization in the United States Bankruptcy Court for the Northern District of Ohio, Eastern Division (the "Bankruptcy Court"). The anticipated petition date is June 20, 2022, and the case is expected to be assigned Case No. 22-51247.
The retention of professional persons in a Chapter 11 case is governed by Section 327(a) of the Bankruptcy Code, 11 U.S.C. § 327(a). Under that provision, a debtor in possession may, with court approval, employ one or more attorneys that do not hold or represent an interest adverse to the estate and that are "disinterested persons" as defined in 11 U.S.C. § 101(14). These statutory requirements impose a rigorous standard on proposed debtor's counsel and require full and transparent disclosure of all connections between the proposed counsel and the debtor, the creditor body, and all other parties in interest.
In addition to the substantive requirements of Section 327(a), Federal Rule of Bankruptcy Procedure 2014 requires that any application for the employment of a professional person be accompanied by a verified statement of the proposed professional setting forth all of its connections with the debtor, creditors, any other parties in interest, their respective attorneys and accountants, the United States Trustee, and any person employed in the office of the United States Trustee. The scope of required disclosure under Rule 2014 is broad and extends to connections that may not rise to the level of a disqualifying conflict but that the Court must evaluate in determining whether to approve the retention.
This memorandum sets forth the legal standards applicable to the retention of debtor's counsel, the methodology employed in conducting the conflicts analysis, the results of the search conducted against all known parties in interest, the analysis of each identified connection, and the undersigned's recommendations regarding the Firm's eligibility for retention and the disclosures that must be made in connection with the Rule 2014 Verified Statement and the Section 327(a) retention application.
Summary Conclusion: Based on the comprehensive analysis set forth below, it is the conclusion of the undersigned that Calderwood & Harkness LLP is disinterested within the meaning of 11 U.S.C. § 101(14), does not hold or represent an interest adverse to the Debtors' estates, and is eligible for retention as debtor's counsel under 11 U.S.C. § 327(a), subject to the disclosures identified herein. Nine connections with parties in interest have been identified, all of which are either prior representations that have been concluded, routine co-professional relationships, or ministerial service-provider relationships. None of these connections gives rise to a disqualifying conflict, but each must be disclosed in the Verified Statement to be filed with the Bankruptcy Court.
II. LEGAL STANDARD
A. Section 327(a) — Retention of Professional Persons
Section 327(a) of the Bankruptcy Code provides, in relevant part:
"Except as otherwise provided in this section, the trustee, with the court's approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title."
11 U.S.C. § 327(a). Because a debtor in possession exercises the rights and powers of a trustee under 11 U.S.C. § 1107(a), the requirements of Section 327(a) apply with equal force to the retention of professionals by a debtor in possession in a Chapter 11 case.
The retention of debtor's counsel under Section 327(a) thus imposes two independent requirements: (1) the proposed counsel must not "hold or represent an interest adverse to the estate," and (2) the proposed counsel must be a "disinterested person." Both requirements must be satisfied for the retention to be approved. The application for retention must be submitted to the Court and is subject to review by the United States Trustee and any party in interest who may object. Approval is not automatic, and the Court retains discretion to deny the application if the statutory requirements are not met or if the disclosures are inadequate.
The phrase "hold or represent an interest adverse to the estate" has been construed broadly by bankruptcy courts. An "adverse interest" exists when the professional possesses or asserts any economic interest that would tend to lessen the value of the bankruptcy estate or that would create either an actual or potential dispute in which the estate is a rival claimant. See In re BH S&B Holdings LLC, 420 B.R. 112, 138 (Bankr. S.D.N.Y. 2009); In re AroChem Corp., 176 F.3d 610, 623 (2d Cir. 1999). The "adverse interest" test examines both actual conflicts and the potential for conflicts that could impair the professional's ability to exercise independent judgment on behalf of the estate.
B. Section 101(14) — Definition of "Disinterested Person"
Section 101(14) of the Bankruptcy Code defines "disinterested person" as a person that:
(A) is not a creditor, an equity security holder, or an insider;
(B) is not and was not, within 2 years before the date of the filing of the petition, a director, officer, or employee of the debtor; and
(C) does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason.
11 U.S.C. § 101(14). The definition is conjunctive: the proposed professional must satisfy all three prongs to qualify as a disinterested person. The third prong — the absence of a "materially adverse" interest — requires examination of the totality of the professional's relationships and connections with the debtor and all parties in interest. Unlike the "adverse interest" test under Section 327(a), the "materially adverse" standard under Section 101(14)(C) has been construed as requiring a showing that the interest is both material and adverse, not merely that a connection or prior relationship exists. See In re Granite Partners, L.P., 219 B.R. 22, 33–34 (Bankr. S.D.N.Y. 1998).
C. Bankruptcy Rule 2014
Federal Rule of Bankruptcy Procedure 2014 governs the application for employment of professional persons and provides, in pertinent part:
"An order approving the employment of attorneys, accountants, appraisers, auctioneers, agents, or other professionals pursuant to § 327 ... of the Code shall be made only on application of the trustee or committee. The application shall be accompanied by a verified statement of the person to be employed setting forth the person's connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States Trustee, or any person employed in the office of the United States Trustee."
Fed. R. Bankr. P. 2014(a). The disclosure obligation under Rule 2014 is extensive and is not limited to relationships that constitute actual conflicts. Courts in the Sixth Circuit and elsewhere have emphasized that the duty of disclosure is broad and requires revelation of all connections, even those that may ultimately prove immaterial to the disinterestedness or adverse-interest analysis. See In re Middleton Arms, L.P., 934 F.2d 723, 725 (6th Cir. 1991) (emphasizing importance of full disclosure by professionals seeking retention in bankruptcy cases). Failure to make complete disclosures under Rule 2014 may result in disgorgement of fees, denial of the retention application, or disqualification of the professional, even if the undisclosed connection would not have been disqualifying on its merits.
D. Relevant Case Law Standards
Courts in the Northern District of Ohio and the Sixth Circuit have generally applied a facts-and-circumstances analysis in evaluating disinterestedness and adverse-interest challenges, rather than applying a per se disqualification rule for every connection between proposed counsel and a party in interest. See In re Big Rivers Elec. Corp., 213 B.R. 962, 977–78 (Bankr. W.D. Ky. 1997) (applying Sixth Circuit law and rejecting per se disqualification rule in favor of examination of the nature, timing, and relevance of the prior relationship). The Sixth Circuit has recognized that in complex Chapter 11 cases involving large debtors and numerous creditors, it is not uncommon for proposed counsel to have some prior connection with one or more parties in interest. The relevant inquiry is whether the nature and extent of the connection is such that it creates an actual or potential conflict that would impair counsel's ability to exercise independent professional judgment on behalf of the estate. See In re Middleton Arms, L.P., 934 F.2d at 725–26.
At the same time, courts in this Circuit have emphasized that the duty of disclosure under Rule 2014 is absolute and that any failure to disclose a known connection — regardless of its materiality — may constitute grounds for sanctions. The prevailing standard thus requires proposed counsel to err on the side of over-disclosure, revealing all connections and allowing the Court, the United States Trustee, and parties in interest to evaluate their significance.
III. METHODOLOGY
The conflicts analysis summarized in this memorandum was conducted as follows:
1. Identification of Parties in Interest. Beginning on June 3, 2022, the undersigned compiled a comprehensive list of all known parties in interest in connection with the anticipated Chapter 11 filing by the Debtors. This list was developed from the following sources: (a) the Debtors' organizational documents, corporate structure charts, and officer/director rosters; (b) the First Lien Credit Agreement dated October 13, 2017, including all amendments thereto, and the lender roster thereunder; (c) the Indenture dated October 13, 2017 governing the 9.75% Senior Secured Second Lien Notes due 2024; (d) the Restructuring Support Agreement dated May 15, 2022 (the "RSA") and attached term sheet; (e) drafts of the proposed Plan of Reorganization and Disclosure Statement; (f) the Debtors' schedules of creditors, lists of executory contracts and unexpired leases, and lists of the twenty largest unsecured creditors; (g) engagement letters and fee arrangements with all professional advisors retained or proposed to be retained by the Debtors; and (h) publicly available information regarding the composition of the ad hoc groups and their respective advisors. The complete list of parties searched is set forth in Appendix A to this memorandum.
2. Database Search. On June 6 and June 7, 2022, the undersigned conducted a comprehensive conflicts search using C&H's internal conflicts database (the "Database"). The Database includes records of all current and former clients, all current and former matters, all adverse parties identified in the course of each engagement, and all lateral attorney hire records (including portable client lists submitted by lateral partners and associates). The search was run against the full legal name, all known trade names or d/b/a names, and all known affiliates and subsidiaries of each party in interest identified in step (1) above. The search was also run against the names of all known individual officers, directors, managers, and key personnel of the Debtors and all identified parties in interest.
3. Cross-Reference Against Active and Closed Client/Matter Lists. The Database search results were cross-referenced against C&H's active client list and closed matter archives to confirm the current status of any identified relationships and to determine whether any prior engagement involved the receipt of confidential information relevant to the present matter.
4. Lateral Hire Records. The Database search was supplemented by a review of lateral hire records for all attorneys who joined C&H within the past five years, to determine whether any such attorney brought a portable client relationship with any identified party in interest.
5. Pro Bono Intake Records. The undersigned reviewed C&H's pro bono intake records to determine whether any pro bono representation involved a party in interest identified in this analysis.
6. Practice Group Consultations. The undersigned conducted discussions with partners in the following practice groups to identify any connections that might not be captured in the Database: (a) Banking & Finance (Partner: David Reinhardt); (b) Capital Markets (Partner: Elena Sorrentino); (c) Corporate/M&A (Partner: James Cavanaugh); (d) Litigation (Partner: Margaret Tsai); and (e) Real Estate (Partner: Robert Flanagan). Each partner confirmed, based on personal knowledge, that no additional connections exist beyond those identified in the Database search.
7. Documentation. All search results were printed and preserved in the matter file. The undersigned retained electronic copies of all search queries, search parameters, and search results.
The results of the foregoing analysis are set forth in Section IV below.
IV. PARTIES SEARCHED AND IDENTIFIED CONNECTIONS
A. The Debtors and Their Affiliates
1. Crestline Packaging Solutions LLC
Crestline Packaging Solutions LLC is an Ohio limited liability company (EIN: 31-1782094) with its principal place of business and headquarters located at 4710 Industrial Corridor Drive, Akron, Ohio 44308. Crestline is a specialty chemical packaging and industrial containment manufacturer, operating four manufacturing plants in northeastern Ohio and employing approximately 1,420 employees as of the anticipated petition date. The company manufactures a range of rigid industrial packaging products, including polyethylene drums, intermediate bulk containers, and specialty containment systems for chemical and petrochemical applications. Crestline's Chief Executive Officer is Marcus J. Reinholdt, its Chief Financial Officer is Dana Kowalski, and its General Counsel is Preston Yee.
Search Result: No prior or current C&H representations of Crestline Packaging Solutions LLC were identified. No connections of any kind were identified between C&H and Crestline.
2. CPS Holdings Inc.
CPS Holdings Inc. is a Delaware corporation (EIN: 82-3491657) with its registered agent at 1209 Orange Street, Wilmington, Delaware 19801, care of National Corporate Services, Inc. CPS Holdings is the direct parent of Crestline and serves as an intermediate holding entity formed in connection with the leveraged buyout of Crestline by Thornfield Capital Partners LP in 2017. CPS Holdings is a co-debtor in the proposed Chapter 11 case and will be included in the joint plan of reorganization.
Search Result: No prior or current C&H representations of CPS Holdings Inc. were identified. No connections of any kind were identified between C&H and CPS Holdings.
3. Officers and Directors of the Debtors
The following individuals currently serve as officers or directors of the Debtors or sit on the Board of Managers of Crestline:
• Marcus J. Reinholdt — Chief Executive Officer, Crestline Packaging Solutions LLC; Member, Board of Managers
• Dana Kowalski — Chief Financial Officer, Crestline Packaging Solutions LLC
• Preston Yee — General Counsel, Crestline Packaging Solutions LLC
• Rebecca Strand — Member, Board of Managers (designee of Thornfield Capital Partners LP); Deal Partner, Thornfield Capital Partners LP
• Julian Ashford — Member, Board of Managers (designee of Thornfield Capital Partners LP); Managing Partner, Thornfield Capital Partners LP
Search Result: No prior or current C&H representations of any individual officer, director, or manager of the Debtors were identified. No connections of any kind were identified between C&H and any of the foregoing individuals in their individual capacities.
B. Equity Sponsor
4. Thornfield Capital Partners LP
Thornfield Capital Partners LP is a Delaware limited partnership with its principal office located at 590 Lexington Avenue, Suite 3200, New York, New York 10022. Thornfield is a private equity firm with assets under management of approximately $4.8 billion across multiple funds. Julian Ashford serves as Managing Partner, and Rebecca Strand serves as the Deal Partner responsible for the Crestline investment. Thornfield acquired 100% of the equity interests of CPS Holdings Inc. in October 2017 in a leveraged buyout transaction with an enterprise value of approximately $410 million, funded in part with an equity contribution of approximately $163 million. Under the proposed prepackaged plan of reorganization, all of Thornfield's equity interests in CPS Holdings will be cancelled, and Thornfield will receive no recovery on account of its equity position.
Search Result: The conflicts search identified one prior C&H engagement involving Thornfield Capital Partners LP. In 2019, C&H represented Thornfield in an employment-related litigation matter in the Supreme Court of the State of New York, New York County. The matter involved claims by a former Thornfield employee alleging wrongful termination and breach of a restrictive covenant agreement. The engagement was assigned C&H Matter No. 1006-00002. The matter was resolved by confidential settlement, and the representation was concluded and the matter closed in February 2020. C&H has had no engagement with Thornfield since the closure of that matter and does not maintain any ongoing attorney-client relationship with Thornfield.
Analysis: The prior representation of Thornfield requires careful evaluation given that Thornfield is the equity sponsor of the Debtors, and, under the proposed plan, Thornfield's equity interests will be cancelled with no recovery. In the Chapter 11 case, C&H, as debtor's counsel, will owe fiduciary duties to the Debtors' estates and, by extension, to all creditors. Thornfield, as the holder of equity interests that are proposed to be cancelled, may have interests that diverge from those of the estates — for example, if Thornfield were to contest the plan or assert that the Debtors are solvent, Thornfield's interests could be adverse to those of the creditor constituencies supported by the plan.
However, several factors support the conclusion that the prior representation of Thornfield does not create a disqualifying conflict:
(a) The prior matter is unrelated. The 2019 employment litigation matter involved claims arising from Thornfield's internal employment practices and bore no connection whatsoever to Crestline, CPS Holdings, the Debtors' business operations, the Debtors' capital structure, or the proposed restructuring.
(b) The prior matter is closed. The representation was concluded more than two years before the anticipated petition date of June 20, 2022. There is no ongoing attorney-client relationship between C&H and Thornfield.
(c) No relevant confidential information was obtained. In the course of the prior representation, C&H obtained confidential information relating solely to the employment dispute at issue, including personnel records, internal communications regarding the former employee, and settlement negotiations. None of this information is relevant to the Crestline restructuring, the Debtors' financial condition, or the proposed plan.
(d) Thornfield has been informed. Thornfield has been advised of C&H's proposed engagement as debtor's counsel and has not objected. While Thornfield's non-objection does not eliminate the disclosure obligation or the Court's independent analysis, it is relevant to the practical assessment of whether an actual conflict exists.
(e) Thornfield will not be a participant in the reorganized entity. Under the proposed plan, Thornfield's equity interests will be cancelled and Thornfield will have no continuing role in the reorganized Debtors. This eliminates the potential for any ongoing tension between C&H's duties to the estates and any residual relationship with Thornfield.
Based on the foregoing, the undersigned concludes that the prior representation of Thornfield does not create a disqualifying adverse interest or impair C&H's disinterestedness under Section 101(14). This connection will be fully disclosed in the Verified Statement and the Section 327(a) application.
C. Senior Secured Lenders — First Lien Credit Facility
5. Ridgeline National Bank, N.A.
Ridgeline National Bank, N.A. is a national banking association with its principal office located at 200 Public Square, Cleveland, Ohio 44114. Ridgeline serves as Administrative Agent and Collateral Agent under the First Lien Credit Agreement dated October 13, 2017 (as amended, restated, supplemented, or otherwise modified from time to time, the "First Lien Credit Agreement"). The First Lien Credit Agreement provides for two facilities:
• First Lien Revolving Credit Facility: $40.0 million aggregate commitment, of which $32.6 million is drawn and outstanding as of the anticipated petition date.
• First Lien Term Loan: $175.0 million original principal amount, of which $158.7 million remains outstanding as of the anticipated petition date (reflecting scheduled amortization payments and voluntary prepayments made through the date hereof).
Total first lien claims are approximately $191.3 million ($32.6 million drawn on the revolver plus $158.7 million outstanding on the term loan), exclusive of accrued but unpaid interest, fees, and expenses.
Ridgeline is also the proposed lender and agent under the contemplated debtor-in-possession financing facility, a $30.0 million superpriority revolving credit facility (the "DIP Facility") to be provided on terms set forth in the DIP term sheet attached as an exhibit to the RSA.
Search Result: The conflicts search identified two prior C&H engagements in which Ridgeline National Bank, N.A. was a party — specifically, a lender — in syndicated lending transactions where C&H served as counsel to the borrower (not as counsel to Ridgeline or the lending syndicate). The first engagement was a syndicated term loan facility in 2018 (C&H Matter No. 1006-00002), and the second was a revolving credit facility in 2020 (C&H Matter No. 1006-00002). Both matters were unrelated to Crestline or the packaging industry. Both matters are now closed. C&H does not currently represent Ridgeline in any active matter. C&H has never served as counsel to Ridgeline in any capacity — that is, C&H has never represented Ridgeline as a client.
Analysis: The two prior matters in which C&H served as borrower's counsel in syndicated lending transactions where Ridgeline participated as a lender did not give rise to an attorney-client relationship between C&H and Ridgeline. In each of those transactions, Ridgeline was represented by its own counsel. C&H did not receive any confidential information from Ridgeline in connection with either transaction. The transactions were unrelated to Crestline and are now closed.
In the proposed Chapter 11 case, Ridgeline will be a significant party in interest — as Administrative Agent and Collateral Agent under the First Lien Credit Agreement and as the proposed DIP lender. The Debtors and C&H will need to negotiate the terms of the DIP Facility with Ridgeline and its counsel, and the first lien claims held or administered by Ridgeline will be addressed under the proposed plan. However, because no attorney-client relationship ever existed between C&H and Ridgeline, there is no basis for a claim of conflicting loyalties or a risk that C&H would be constrained in its advocacy on behalf of the Debtors' estates.
This connection must be disclosed under Rule 2014 but does not create a disqualifying adverse interest or impair C&H's disinterestedness.
6. Ad Hoc Group of First Lien Lenders
An ad hoc group of holders of claims arising under the First Lien Term Loan has been organized informally since approximately March 2022. The members of the ad hoc group collectively hold approximately 68% of the outstanding principal amount of the First Lien Term Loan. Based on information provided by the Debtors and their financial advisor, the key members of the ad hoc group are as follows:
• Blackmoor Capital Management LLC — A CLO and credit fund with offices at 399 Park Avenue, 18th Floor, New York, New York 10043. Blackmoor holds approximately $41.2 million in principal amount of the First Lien Term Loan. The Principal responsible for the Crestline position is Arthur Ng.
• Greystone Fixed Income Partners LP — A credit-focused investment fund with offices at One Financial Center, Suite 2800, Boston, Massachusetts 02111. Greystone holds approximately $28.6 million in principal amount of the First Lien Term Loan. The Principal responsible for the Crestline position is Sandra Ibanez.
• Wexford Opportunity Fund III LP — A distressed debt fund with offices at 1801 Century Park East, Suite 1450, Los Angeles, California 90067. Wexford holds approximately $37.9 million in principal amount of the First Lien Term Loan. The Principal responsible for the Crestline position is Derek Loomis.
Search Results:
• Blackmoor Capital Management LLC: No prior or current C&H representations. No connections identified.
• Greystone Fixed Income Partners LP: No prior or current C&H representations. No connections identified.
• Wexford Opportunity Fund III LP: No prior or current C&H representations. No connections identified.
• Arthur Ng: No prior or current C&H representations. No connections identified.
• Sandra Ibanez: No prior or current C&H representations. No connections identified.
• Derek Loomis: No prior or current C&H representations. No connections identified.
7. Hargrove, Mitchell & Saunders LLP (Counsel to Ad Hoc Group of First Lien Lenders)
Hargrove, Mitchell & Saunders LLP ("HMS") is a law firm with its principal office at 51 West 52nd Street, New York, New York 10019. HMS has been retained as counsel to the Ad Hoc Group of First Lien Lenders in connection with the Crestline restructuring. The lead partner on the engagement is Victoria Kline, and the lead associate is Thomas Frey.
Search Result: No current or prior attorney-client relationship exists between C&H and HMS. A review of C&H's case history indicates that C&H and HMS have appeared on opposite sides in prior bankruptcy and restructuring matters, which is typical in the ordinary course of a national restructuring practice. In addition, C&H attorneys co-counseled with HMS attorneys on one prior unrelated matter in 2016 (an out-of-court restructuring in which both firms represented the same debtor client). No personal connections between C&H personnel and Victoria Kline or Thomas Frey were identified.
Analysis: The relationship between C&H and HMS is that of firms that regularly encounter one another in the bankruptcy and restructuring practice. The fact that the firms have appeared on opposite sides, and on one occasion co-counseled, in prior matters is unremarkable and does not create any conflict. HMS will serve as opposing counsel in the Chapter 11 case, and this relationship will be disclosed under Rule 2014 accordingly.
D. Second Lien Noteholders
8. Second Lien Notes and Indenture Trustee
The Debtors' capital structure includes $60.0 million in original aggregate principal amount of 9.75% Senior Secured Second Lien Notes due 2024 (the "Second Lien Notes"), issued on October 13, 2017 pursuant to an Indenture of even date (the "Indenture"). The Second Lien Notes bear CUSIP number 22761TAA3. The outstanding principal amount of the Second Lien Notes is $56.0 million, reflecting $4.0 million in aggregate principal amount of open-market repurchases executed by the Debtors in 2019. Accrued and unpaid interest on the Second Lien Notes, including default rate interest at an additional 2.00% per annum from the date of the Notice of Default issued on April 22, 2022, is approximately $3.9 million as of the anticipated petition date. Total second lien claims are therefore approximately $59.9 million ($56.0 million in outstanding principal plus $3.9 million in accrued interest).
The Indenture Trustee under the Indenture is Continental Fiduciary Trust Company, with its corporate trust office located at 101 Barclay Street, New York, New York 10286. Continental Fiduciary serves in a fiduciary capacity as trustee for the benefit of the holders of the Second Lien Notes and is responsible for administering the Indenture, enforcing the rights of the noteholders, and distributing payments thereunder.
Search Result (Continental Fiduciary Trust Company): The conflicts search revealed that C&H has represented issuers in capital markets transactions in which Continental Fiduciary Trust Company served as indenture trustee in at least four prior matters across various years. In each such engagement, C&H represented the issuer of the securities, not Continental Fiduciary. Continental Fiduciary was represented by its own counsel in each transaction. C&H has no current engagement involving Continental Fiduciary Trust Company as a client. Continental Fiduciary Trust Company has never been an C&H client. C&H did not receive any confidential information of Continental Fiduciary in connection with any of these transactions.
Analysis: The relationship between C&H and Continental Fiduciary is a commonplace one in the capital markets practice: C&H has, on multiple occasions, represented issuers in transactions where Continental Fiduciary served as indenture trustee. This is a typical arm's-length, transactional relationship that does not give rise to an attorney-client relationship between C&H and Continental Fiduciary. In the proposed Chapter 11 case, Continental Fiduciary, as Indenture Trustee, will be a party in interest with standing to appear and be heard on matters affecting the rights of the Second Lien Noteholders. C&H's prior interactions with Continental Fiduciary on unrelated transactions do not create any conflict of interest or impair C&H's disinterestedness. This connection will be disclosed under Rule 2014.
9. Ad Hoc Group of Second Lien Noteholders
An ad hoc group of holders of the Second Lien Notes has been organized and holds approximately 72% of the outstanding principal amount of the Second Lien Notes. Based on information available to the Debtors, the key members of the ad hoc group are:
• Fenwick Structured Credit Fund II LP — A credit fund with offices at 200 Clarendon Street, 40th Floor, Boston, Massachusetts 02116. Fenwick holds approximately $18.3 million in principal amount of the Second Lien Notes. The Principal responsible for the Crestline position is Liam Driscoll.
• Millhaven Capital Advisors LLC — A credit advisory and investment firm with offices at 600 Travis Street, Suite 5500, Houston, Texas 77002. Millhaven holds approximately $22.1 million in principal amount of the Second Lien Notes. The Principal responsible for the Crestline position is Karen Ostrowski.
Search Results:
• Fenwick Structured Credit Fund II LP: No prior or current C&H representations. No connections identified.
• Millhaven Capital Advisors LLC: No prior or current C&H representations. No connections identified.
• Liam Driscoll: No prior or current C&H representations or personal connections identified.
• Karen Ostrowski: No prior or current C&H representations or personal connections identified.
10. Pemberton & Locke LLP (Counsel to Ad Hoc Group of Second Lien Noteholders)
Pemberton & Locke LLP ("P&L") is a law firm with its principal office at 1 Liberty Plaza, New York, New York 10006. P&L has been retained as counsel to the Ad Hoc Group of Second Lien Noteholders. The lead partner on the engagement is Raymond Delvecchio, and the lead associate is Nia Patterson.
Search Result: No current or prior attorney-client relationship exists between C&H and Pemberton & Locke LLP. A review of C&H's case history indicates that C&H attorneys and P&L attorneys have appeared on opposite sides in at least two prior bankruptcy and restructuring matters, which is typical in the ordinary course of practice. No personal connections between C&H personnel and Raymond Delvecchio or Nia Patterson were identified.
Analysis: The relationship between C&H and P&L is analogous to the C&H/HMS relationship described above. The firms are industry participants that regularly encounter one another in restructuring matters. P&L will serve as opposing counsel in the Chapter 11 case, and this relationship will be disclosed under Rule 2014 accordingly. No conflict exists.
E. Other Creditors and Contract Counterparties
11. Northstar Polymers Inc.
Northstar Polymers Inc. is a Texas corporation with its principal office in Houston, Texas. Northstar is the counterparty to a Resin Supply Agreement dated March 1, 2019 (the "Resin Supply Agreement"), pursuant to which Northstar supplies polyethylene and polypropylene resin to Crestline for use in its manufacturing operations. The Resin Supply Agreement has a five-year term and is expected to be assumed by the Debtors under the proposed plan of reorganization.
Search Result: No prior or current C&H representations of Northstar Polymers Inc. were identified. No connections of any kind were identified.
12. Meridian Industrial Leasing Corp.
Meridian Industrial Leasing Corp. is an Ohio corporation. Meridian is the lessor under a seven-year Master Equipment Lease (the "Equipment Lease") for extrusion equipment installed at Crestline's Plant 4 facility. Monthly lease payments under the Equipment Lease are $87,500. The Equipment Lease is expected to be assumed by the Debtors under the proposed plan of reorganization.
Search Result: No prior or current C&H representations of Meridian Industrial Leasing Corp. were identified. No connections of any kind were identified.
13. Benchmark Real Estate Holdings LLC
Benchmark Real Estate Holdings LLC is an Ohio limited liability company. Benchmark is the landlord under a warehouse lease for the premises located at 900 Darrow Road, Akron, Ohio 44305 (the "Warehouse Lease"). Monthly rent under the Warehouse Lease is $42,000. The Warehouse Lease expires on December 31, 2025. The Debtors are currently three months in arrears on rent payments, resulting in a cure amount of approximately $126,000. The Warehouse Lease is expected to be assumed under the proposed plan, subject to payment of the cure amount.
Search Result: No prior or current C&H representations of Benchmark Real Estate Holdings LLC were identified. No connections of any kind were identified.
F. Professional Advisors to the Debtors
14. Aldersgate Advisory Group LLC
Aldersgate Advisory Group LLC is a Delaware limited liability company with its principal office at 280 Park Avenue, 12th Floor, New York, New York 10017. Aldersgate has been retained as financial advisor and investment banker to the Debtors in connection with the restructuring. The Lead Managing Director responsible for the engagement is Priya Narayanan. The fee arrangement includes a monthly advisory fee of $175,000 and a restructuring completion fee of $3.5 million.
Search Result: No current or prior attorney-client relationship exists between C&H and Aldersgate Advisory Group LLC. The conflicts search revealed that C&H and Aldersgate have worked together as co-advisors to debtors in two prior restructuring matters — one in 2019 and one in 2021. In each instance, C&H served as debtor's counsel and Aldersgate served as the debtor's financial advisor. This is a typical co-professional relationship and does not create any conflict of interest.
Analysis: The co-professional relationship between C&H and Aldersgate is routine and common in the restructuring practice. C&H and Aldersgate do not have an attorney-client relationship with each other; rather, they serve as separate professional advisors to the same client. The prior co-engagements do not give rise to any conflict, but they will be disclosed in the Verified Statement under Rule 2014 as required.
15. Kellner & Hartwick LLP (Proposed Local Co-Counsel)
Kellner & Hartwick LLP ("K&H") is a law firm with its principal office at 600 Superior Avenue East, Suite 1800, Cleveland, Ohio 44114. K&H has been engaged as proposed local co-counsel to Crestline in the Northern District of Ohio. The lead partner on the engagement is Bruce Tatelman. Estimated fees for K&H's services are $380,000.
Search Result: No attorney-client conflict exists between C&H and K&H. The conflicts search revealed that C&H has engaged K&H as local counsel in two prior matters in the Northern District of Ohio — one in 2017 and one in 2020. In each instance, K&H served as local counsel to C&H's client in matters unrelated to Crestline. This is a typical co-counsel relationship.
Analysis: The co-counsel relationship between C&H and K&H is routine and does not create any conflict. C&H and K&H will serve as co-counsel to the Debtors in the Chapter 11 case, with C&H serving as lead debtor's counsel and K&H serving as local co-counsel. This arrangement will be disclosed under Rule 2014.
16. Dralvecen Reyes Linley CPAs LLP & Associates LLP (Accounting/Tax Advisor)
Dralvecen Reyes Linley CPAs LLP & Associates LLP is an accounting firm with its principal office at 191 North Wacker Drive, Suite 2300, Chicago, Illinois 60606. Dralvecen Reyes Linley CPAs LLP has been retained to provide tax advisory services and fresh-start accounting for the Debtors in connection with the restructuring. The lead partner on the engagement is Catherine Holtz.
Search Result: No prior or current attorney-client relationship between C&H and Dralvecen Reyes Linley CPAs LLP & Associates LLP was identified. No connections of any kind were identified.
17. Pinnacle Claims Administration LLC (Claims and Noticing Agent)
Pinnacle Claims Administration LLC is a claims and noticing agent with its principal office at 1010 Dale Street North, St. Paul, Minnesota 55117. Pinnacle has been retained (subject to Court approval) as the claims and noticing agent in the Chapter 11 case. Estimated fees for Pinnacle's services are $285,000.
Search Result: The conflicts search revealed that C&H has worked with Pinnacle as a claims and noticing agent in multiple prior Chapter 11 cases. In each such case, Pinnacle served as a court-approved service provider, and C&H served as debtor's counsel or counsel to other parties. There is no attorney-client relationship between C&H and Pinnacle. This is a routine service-provider relationship.
Analysis: The relationship between C&H and Pinnacle is a standard co-professional relationship of the kind that exists in virtually every large Chapter 11 case. Claims agents serve in an administrative capacity and do not have interests that are adverse to, or aligned with, any particular party in interest. No conflict exists. This connection will be disclosed under Rule 2014 as a standard co-professional disclosure.
G. Insurance
18. Apex Indemnity Insurance Company (D&O Tail Insurance Carrier)
Apex Indemnity Insurance Company is an Illinois domestic stock insurance company with its principal office at 233 South Wacker Drive, Suite 4800, Chicago, Illinois 60606. Apex Indemnity is the carrier of the directors' and officers' liability tail insurance policy (the "D&O Tail Policy") for the Debtors' officers and directors. The D&O Tail Policy has an aggregate limit of $15.0 million and was obtained for a tail premium of $1.2 million.
Search Result: No prior or current C&H representations of Apex Indemnity Insurance Company were identified. No connections of any kind were identified.
H. U.S. Trustee
19. Office of the United States Trustee — Region 9
The Office of the United States Trustee for Region 9, located at the Howard M. Metzenbaum U.S. Courthouse, 201 Superior Avenue, Cleveland, Ohio 44114, will have oversight responsibility for the Chapter 11 case, including the review and, if appropriate, objection to the Debtors' retention applications.
Search Result: C&H has no relationship with the United States Trustee or any person employed in the Office of the United States Trustee for Region 9 other than appearances in prior bankruptcy cases in the ordinary course of the Firm's restructuring practice. These ordinary-course appearances do not create any conflict or connection requiring specific disclosure beyond the general statement in the Verified Statement.
I. Registered Agent
20. National Corporate Services, Inc.
National Corporate Services, Inc. is a Delaware corporation that serves as the registered agent for CPS Holdings Inc. at 1209 Orange Street, Wilmington, Delaware 19801.
Search Result: National Corporate Services, Inc. serves as the registered agent for numerous C&H clients in the State of Delaware. This is a ministerial service-provider relationship that does not give rise to any attorney-client relationship, any conflict of interest, or any impairment of C&H's disinterestedness. NCS provides registered agent services on a non-exclusive, commercially available basis to thousands of entities. No conflict exists. This connection will be disclosed under Rule 2014 for completeness.
V. SUMMARY OF IDENTIFIED CONNECTIONS REQUIRING DISCLOSURE
The following table summarizes all connections identified in the course of the conflicts analysis that require disclosure in the Verified Statement to be filed pursuant to Federal Rule of Bankruptcy Procedure 2014:
As reflected in the table above, none of the identified connections gives rise to a disqualifying conflict of interest. All connections will be disclosed in the Verified Statement and the Section 327(a) retention application.
VI. ANALYSIS OF DISINTERESTEDNESS
A. C&H Is Not a Creditor or Equity Security Holder
Calderwood & Harkness LLP holds no claim against, and no equity interest in, either Debtor or any affiliate of the Debtors. C&H is not a creditor of the estates within the meaning of 11 U.S.C. § 101(10), and C&H is not an equity security holder within the meaning of 11 U.S.C. § 101(17).
The Firm notes that it is anticipated that a prepetition retainer of $500,000 will be received from the Debtors on or about June 10, 2022. This retainer will be deposited into and held in C&H's client trust account (IOLTA) at Greaves Bancorp and will not be applied to fees or expenses unless and until fees are approved by the Bankruptcy Court pursuant to 11 U.S.C. §§ 330 and 331. The receipt and holding of the prepetition retainer will be fully disclosed in the retention application. To the extent that any portion of the retainer constitutes a claim against the estates, such claim arises from the prepetition engagement and is disclosed herein. However, it is the Firm's position that a retainer held in trust does not render C&H a "creditor" for purposes of the disinterestedness analysis, consistent with prevailing case law in this Circuit and elsewhere. See In re Lee, 94 B.R. 172, 177 (Bankr. C.D. Cal. 1988); In re Rusty Jones, Inc., 134 B.R. 321, 345 (Bankr. N.D. Ill. 1991).
B. C&H Is Not an Insider
No C&H attorney, partner, associate, of counsel, or employee is or has been, within the two-year period preceding the anticipated petition date of June 20, 2022, a director, officer, or employee of either Debtor or any affiliate of the Debtors. No C&H attorney, partner, associate, of counsel, or employee is a relative of any director, officer, or employee of either Debtor, to the knowledge of the undersigned. C&H does not qualify as an "insider" of the Debtors within the meaning of 11 U.S.C. § 101(31).
C. No Materially Adverse Interest
The undersigned has carefully evaluated whether any of the connections identified in Section IV and summarized in Section V give rise to an interest "materially adverse to the interest of the estate or of any class of creditors or equity security holders" within the meaning of 11 U.S.C. § 101(14)(C). Based on that evaluation, the undersigned concludes that no such materially adverse interest exists.
The two connections warranting the most careful scrutiny are: (1) the prior representation of Thornfield Capital Partners LP, and (2) the prior transactional interactions with Ridgeline National Bank, N.A.
Thornfield Capital Partners LP. As discussed in detail in Section IV.B.4 above, C&H represented Thornfield in an unrelated employment litigation matter that was concluded in February 2020. Thornfield is the equity sponsor of the Debtors, and its equity interests will be cancelled under the proposed plan with no recovery. The potential concern is that C&H's prior representation of Thornfield could create divided loyalties or that C&H might possess confidential information that could be used to Thornfield's disadvantage. However, as set forth in the analysis above: (a) the prior matter was entirely unrelated to the Crestline restructuring; (b) no confidential information relevant to the restructuring was obtained; (c) the prior engagement was closed more than two years before the petition date; (d) there is no ongoing attorney-client relationship; and (e) Thornfield has been informed of the proposed engagement and has not objected. Under the facts-and-circumstances analysis applied in this Circuit, these factors collectively demonstrate that the prior Thornfield representation does not create a materially adverse interest. See In re Big Rivers Elec. Corp., 213 B.R. at 977–78.
Ridgeline National Bank, N.A. As discussed in detail in Section IV.C.5 above, C&H served as borrower's counsel in two unrelated syndicated lending transactions where Ridgeline was a lender. In neither transaction did C&H represent Ridgeline or establish an attorney-client relationship with Ridgeline. Ridgeline was represented by its own counsel in each transaction. No confidential information of Ridgeline was received by C&H. These arm's-length, transactional interactions on opposite sides of the lending table do not create any materially adverse interest.
The remaining identified connections — with Continental Fiduciary Trust Company, Hargrove Mitchell & Saunders LLP, Pemberton & Locke LLP, Aldersgate Advisory Group LLC, Kellner & Hartwick LLP, Pinnacle Claims Administration LLC, and National Corporate Services, Inc. — are routine professional, co-counsel, and service-provider relationships that are commonplace in the bankruptcy and restructuring practice and do not give rise to any materially adverse interest under Section 101(14)(C).
D. Conclusion on Disinterestedness
Based on the foregoing analysis, Calderwood & Harkness LLP satisfies all three prongs of the definition of "disinterested person" under 11 U.S.C. § 101(14):
(A) C&H is not a creditor, equity security holder, or insider of either Debtor;
(B) No C&H attorney is or was, within two years before the anticipated petition date, a director, officer, or employee of either Debtor; and
(C) C&H does not have an interest materially adverse to the interest of the estates or of any class of creditors or equity security holders.
Accordingly, C&H is eligible for retention as debtor's counsel under 11 U.S.C. § 327(a).
VII. REQUIRED DISCLOSURES FOR RULE 2014 VERIFIED STATEMENT
All connections identified in Section V above will be disclosed in the Verified Statement of Calderwood & Harkness LLP (the "Verified Statement") to be filed pursuant to Federal Rule of Bankruptcy Procedure 2014 in connection with the application for retention under 11 U.S.C. § 327(a). The Verified Statement will describe each connection with specificity, including the identity of the party, the nature of the connection, the dates of the relationship, whether the relationship is current or prior, and the basis for C&H's conclusion that the connection does not create a disqualifying conflict.
The Verified Statement will be executed under penalty of perjury by Colette Whitman, as the responsible partner for the engagement. The declaration in support of the retention application will confirm the following:
(i) C&H does not hold or represent any interest adverse to the Debtors' estates;
(ii) C&H is a "disinterested person" within the meaning of 11 U.S.C. § 101(14); and
(iii) All known connections between C&H and the Debtors, creditors, other parties in interest, their respective attorneys and accountants, the United States Trustee, and any person employed in the Office of the United States Trustee have been disclosed.
The Verified Statement and retention application will be prepared by the undersigned and reviewed by Colette Whitman and Nathaniel Bower prior to filing.
VIII. ONGOING MONITORING OBLIGATIONS
The duty of disclosure under Section 327(a) and Rule 2014 is not a one-time obligation. Throughout the pendency of the Chapter 11 case, C&H has an ongoing duty to identify and disclose any new connections that may arise between the Firm and parties in interest. This obligation is particularly important in a complex Chapter 11 case such as this one, where the universe of parties in interest may expand significantly after the petition date as new creditors file proofs of claim, additional members of lending syndicates are identified, potential plan investors emerge, and objecting parties surface.
To fulfill this ongoing obligation, C&H will undertake the following measures:
1. Rolling Conflicts Checks. C&H will conduct supplemental conflicts checks on a rolling basis throughout the engagement as new parties in interest are identified. These supplemental checks will be conducted against the same Database and using the same methodology described in Section III above.
2. Monitoring New Party Identification. The undersigned will monitor the claims register, the service list, and all pleadings filed in the Chapter 11 case to identify new parties in interest — including, without limitation, additional lenders in the first lien syndicate, holders of Second Lien Notes who have not yet been identified, trade creditors who file proofs of claim, potential plan investors or purchasers, and any official committee of unsecured creditors appointed in the case.
3. Prompt Evaluation and Disclosure. Any new connection or potential conflict identified after the filing of the initial Verified Statement will be promptly evaluated by the undersigned, in consultation with Colette Whitman. If the new connection requires disclosure, a supplemental verified statement will be prepared and filed with the Bankruptcy Court on a timely basis.
4. Internal Intake Controls. The C&H intake department has been notified of the Crestline engagement and will flag any new matter intake that involves a party identified on the Crestline party-in-interest list. This flag will trigger a review by the undersigned before any new engagement is opened.
Responsibility for ongoing monitoring of conflicts and connections throughout the Chapter 11 case is assigned to Gabrielle Moss (Lead Associate) and Amy Chesterton (Working Associate), with supervisory oversight by Colette Whitman (Responsible Partner).
IX. RECOMMENDATION
Based on the foregoing analysis, it is the recommendation of the undersigned that Calderwood & Harkness LLP proceed with the proposed engagement as debtor's counsel to Crestline Packaging Solutions LLC and CPS Holdings Inc. in the anticipated prepackaged Chapter 11 case to be filed in the United States Bankruptcy Court for the Northern District of Ohio, Eastern Division.
The following specific actions are recommended:
1. All connections identified in Section V of this memorandum should be fully disclosed in the Rule 2014 Verified Statement and the Section 327(a) retention application to be filed with the Bankruptcy Court promptly following the petition date.
2. The prepetition retainer of $500,000 (anticipated to be received on or about June 10, 2022) should be deposited into and held in C&H's client trust account pending application to fees approved by the Bankruptcy Court. The receipt, amount, and disposition of the retainer should be disclosed in the retention application.
3. The Verified Statement should be executed by Colette Whitman as the responsible partner, and the retention application should be filed concurrently with or within the first few days following the petition.
4. The ongoing monitoring procedures described in Section VIII above should be implemented immediately and maintained throughout the duration of the engagement.
We are available to discuss this memorandum and its conclusions at your convenience.