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In Re: Northwest Territorial Mint

Transcript of Hearing – October 6, 2017 9:30 a.m. before Judge Alston

Let’s turn to the Northwest Territorial Mint matters.

Judge Alston: Alright, good morning everyone. Alright I’ve got the notebooks. Thank you Mr. Gearin for your notebooks and for supplementing the notebook. I always do appreciate that. So, um, hold on a moment. Let me pull up my notes and, um, here’s what…how I’d like to proceed this morning. I have some general comments that I’m gonna make, then I will hear from you Mr. Gearin and I assume you’re going to speak on behalf of you firm and maybe on behalf of the Trustee and maybe on behalf of Cascade Capital and Mr. Calvert you can speak on behalf Cascade Capital if you want.

Mr. Gearin: I intended to make some comments regarding the Trustee and Cascade Capital, but he’s here as you can see…

Judge Alston: Yes.

Mr. Gearin: …I think you want to hear from him and I think he’s prepared to speak, to address the Court.

Judge Alston: Alright. And Mr. Northrup then I’ll hear from you and then I’ll make some more detailed comments after hearing what you have to say. Let me just first note for anyone who is in the courtroom, as the applications indicate, I requested

that the professionals file these fee applications because I had seen the number and had some questions and concerns about specific professional fees being accumulated and specific litigation matters and I in an admittedly unusual move said I want to see a fee application. We are 18 months into this case. The professionals have all noted, I think appropriately so, that it may be premature to approve any fees today and so I am prepared to do that, so not going to make any rulings either approving or denying any fees today, so that may shorten your remarks, but you are here and I’ll give you the opportunity to make whatever remarks you’d like to make. I do note that there were only two responses. One was from Jeffrey McNeal at Docket 1206. This document continues his pattern of nonsense. It makes absolutely no sense what he files. And moreover it violates the Court’s order at Docket 328 that precluded him from filing any more papers or pleadings until he paid sanctions of $5,000. He’s $4,999 short to date. The Court will not consider the response and will not hear any argument from Mr. McNeal. The Court also noted that a response from Luke Martini at Docket 1230 was filed on October 4, a full five days after the deadline and even after the reply date. Since the response was filed significantly late it will also not be considered. The Court did review it and will want counsel to, if they are aware of it, someone tell me what is the Hansen / Pell letter written by members of the committee. So those are my preliminary comments. I’ll turn it over to your Mr. Gearin – I guess one other question I’d like for you to answer is the applications by local rules, interim fee applications, are supposed to identify the tasks that are left to be done and the projected fees and costs to be incurred. I did not see those in the fee applications. I know that’s often a difficult task,

sometimes may seem like an impossible task. Nonetheless the rule requires I think at least lip service toward it. I didn’t see that so you all can address that as well. Um, so Mr. Gearin, on to you.

Mr. Gearin: Aright, thank you Your Honor.

Judge Alston: You’re welcome.

Mr. Gearin: As I think you’ve said I think our intention in filing these was to comply with your direction to put these matters, to put the fee applications in front of the Court in open disclosure of what the fees that are incurred and the details behind those and so we posted those to the web site for the Northwest Territorial Mint. They’re there and available for any creditors to go and view them if they choose to do that. We’ve also filed as I know you’ve seen a detailed status report, a report of the investigation and status report by the Trustee was filed this Tuesday that we linked to the fee applications for you convenience. And I think the status report was intended to provide a significant detail regarding the efforts of the professional in the case and what has been done thus far to make progress in this case towards confirming a plan of reorganization and bringing some recovery to the creditors in this case. This estate continues to operate a significant minting business in Dayton, Nevada as the Court is aware. There’s more than 100 employees down there. It is an active, thriving, operating business performing custom minting activities. It makes more than a million dollars a month in

revenue. It has you know recently not been profitable but I can report to the Court that this past month September there was a small profit so we’ve kind of we think turned the corner with respect to those some of those operations. The business, from the Trustee’s estimation, the enterprise value of that business could be in the range of $14 or $15 million. Coupled with the projected revenues during a two or three year period going forward, the value to the estate could be in the range of $17 or $18 million. So the purpose of this case from the outset was to try to preserve that enterprise value for the benefit of creditors. And the professionals in this case, including the committee’s professionals and the Trustee and his professionals, have worked tirelessly, frankly, to preserve that value and to provide some return to creditors in this case. Without those efforts, Your Honor, there would be no return to creditors and I think we’ve provided for you in our status report the Trustee’s liquidation assessment as of August of 2016, where the estate would have been, if we shut the business down as of that date, the estate would have been administratively insolvent. There would have been no return to general unsecured creditors or anybody other that administrative creditors in this case, if the business had been shut down. So, the thrust of that is that all the work that has been done here has been done to try to preserve the enterprise value in this case, to try to make this business, allow this business to emerge from bankruptcy and provide a return through revenues that can be achieved from the business and a sale or liquidation of the business value for the benefit of creditors. The management of the debtor has brought in a new chief executive officer, Mr. Otalla, as you are aware, we filed a motion with you over some discussion about that on

the record as to whether that was beneficial to the estate or not. Mr. Otalla is optimistic and we provided a statement to you in the status report that reflects Mr. Otalla’s very high optimism as to the prospects of this business and the ability of the business to generate, he believes, actually higher basis of return that the Trustee has estimated. So he talks in his submission in connection with the status report of the turnaround that has occurred within the business and the shift in the morale and the productivity of the people that are down there in Nevada. The estate has had cash flow difficulties. We’ve tried, uh, we’ve prepared and drafted a plan of reorganization and intended to present that to the Court immediately after the Medallic issues were resolved. But we’ve been slowed down by some unexpected cash flow difficulties really generated in the April time frame. Those came as a big surprise to the Trustee. The Trustee had, um, projected about a million and a half dollars in excess cash that would have been available to the estate through the course of 2017 but in April the estate suffered about a $240,000 loss as compared to a couple of hundred thousand dollar expected profit. That basically is the difference in the operational losses in this estate is that one month is the difference in the operational losses from the business that were expected by the Trustee. So that kind of turned our direction and has forestalled us from our ability to move forward and propose a plan. But the Trustee, the point is I think Your Honor, that the Trustee and his professionals made a great deal of progress in this case, preserving the value in this estate and to try and provide a return to creditors. Um, the Trustee has done, the kinds of things he’s done to preserve that value in the business operations, he streamlined those operations significantly. He’s cut back on a number of

employees from 241 to 115. He’s reduced the number of locations, he’s rejected leases, uh, he’s reduced the operating costs on the lease side of things by eliminating a high value lease in Federal Way and replacing that with a new lease in Kent at a much reduced cost. He’s sold the aspect of the business in Texas to reduce the cost of that operation which was unprofitable. And he’s eliminated other costs through streamlining operations down in Dayton. The Trustee’s also spent a lot of time and energy in this case in securing, inventorying, documenting and preserving precious metal assets that were on hand when he took over. In our status report I think you will see great deal about what the Trustee has done in that regard. That has been an issue that is of huge concern to the creditor body. When the creditor body reaches out and they contact my offices or the Trustee’s office or the committee’s office that’s one of the things that many of them ask about. They want to know where this metal went. They all have, many of them have concerns and think there is a significant amount of metal that is still on hand there. Why isn’t my metal that I thought was stored there or leased or that I purchased and why isn’t that on hand and when am I going to get that. So the Trustee did an awful lot of work in going down and locking down that metal, locking down the records that the um, the photographic evidence that was there on the vault activity, um, you know, going back and investigating what became of the metal that was there. Now the Trustee’s been handicapped. There are inadequate records there. There are very little documentation of what little purchase and sales of metals in the business. But what the Trustee has done is he has clearly identified what is there that actually belongs to customers of the mint and he came forward with you on two

separate motions and got authority and returned about $900,000 worth of metal to customers who owned that metal. The rest of it the Trustee has confirmed is gone. And I think what we told you is there’s in the range of $14 million, $13.8 million, that we’re missing precious metal inventory. And it’s been a significant concern to the Trustee, taken a great deal of efforts in trying to go forward and discover what could have happened to that level of precious metal. The particular issue that we brought to your attention I think in the status report is the delivery of the Steven Fox materials found $1.8 million of gold that was delivered to this estate went to the debtor in October of 2015. The Trustee spent a fair amount of time looking into that shipment and the disposition of that $1.8 million worth of gold. The gold was delivered by Mr. Fox with the understanding it was to remain his property, it was to be converted into Canadian Maple Leafs. Mr. Fox never received any of the Canadian Maple Leafs so there’s $1.8 million of his gold that is missing at this point. The Trustee was able to document going through the business records that about, in the ballpark of a million dollars of that was sold, leaving a little more than $800,000 of metal that there’s not, cannot be accounted for that was on hand in October a few months before the bankruptcy case was filed but was not there when the Trustee took possession. So, the Trustee’s gone forward and continued to investigate where could this missing metal be. And a large part of the issues that we have, um, dealt with in pursuing claims against Ms. Erdmann and Mr. Hansen have related to the investigation of those issues. So, the Trustee still has concerns about that. We still have reservations and a belief that there could be other metal that’s out there that has escaped the control of the Trustee.

The Trustee has accomplished another of other things in the case. The Trustee has achieved a number of other objectives through the work that’s been done. And acknowledging Your Honor these are big numbers, the fees that we filed, $4 million worth of fees as of August, we understand those are big numbers. But I think I will say two things about that. One, I think they are actual and necessary expenses and they are beneficial to the estate. These are incurred at the risk of the professionals in this case and we have known that all along. That if we can’t achieve and if we can’t realize the enterprise value in this case, it’s unlikely that we’d be paid for these fees. Secondly, I think there have been a lot of things that have been achieved. We successfully resolved the core issue about the Medallic assets, which was sort of central to bringing any value back into this estate. We assumed the Dayton lease and we successfully resolved the contested issues about the cure with the landlord in that matter. That’s al so core to realizing enterprise value in this case because the Dayton lease is of course essential to the ongoing operations of the manufacturing facility. We entered into a new lease in Kent. We sold the Tomball, Texas assets for a million dollars. The Trustee went back and had to reconstruct and create a new financial reporting system because the financial system within the mint was completely inadequate. They didn’t have any financial reporting for over five years, they hadn’t done their tax returns for over five years. The Trustee created an cash monitoring system. He created a cost accounting system so he could track profitability in specific jobs that were being done. And he reconstructed the banking record so he could track disposition of cash which are really important to our ability to recover fraudulent transfers and to deal with the Medallic issues for example.

The Trustee did a solvency analysis which we presented to you in the status report which shows that the debtor was insolvent going back to 2008. We hired a new CEO for the company. We hired a new plant manager with a motion that we brought before the Court that’s furthered the profitability and the productivity of the business. We hired an auctioneer who conducted an appraisal of equipment. We resolved approximately 15 lawsuits and other disputes that were on hand when the Trustee took over his management of the estate. And those were done through settlements, most of them through settlements, that we brought forward to the Court and some of them through active litigation with some of the parties. But the majority of those were done through settlements. We rejected the Auburn lease and we resolved the appeal of the landlord in that case. We formulated a plan of organization, we had a discussion with the committee about that. There are still significant tax considerations that could be of great benefit to the creditors in this case that the Trustee has evaluated and spent time and had discussions with the committee about and then incorporated into the draft of reorganization. And finally, the Trustee has prepared a detailed marketing package. He has presented that to a number of parties who have expressed interest in the business. There is active interest in people who are expressing interest in purchasing or otherwise investing in this company. So, um, I appreciate that the Court has determined that you will defer ruling on these fee applications. We think that is appropriate and we think that what we intend to do is that we will come back to the Court when we, the direction of the case is more certain, when we have a sale to propose to your or a plan that we can propose to you and at that time I think it will

measure more specifically what value has been conferred on the estate. But from my perspective Your Honor I think that the work that has been done by the Trustee has been work tirelessly in this case, a lot of anxiety that has gone into it, he has worked very, very hard and, and what he has done to piece this together and to hold the business together has been extremely beneficial. And it is the only way we are going to get a return on the case.

So I go back to your original questions Your Honor, which I think…

Judge Alston: Where there were two. One is do you know about this letter that Mr. Martini references in his …

Mr. Gearin: I think, I think I do Your Honor and I think it’s, um, maybe something Mr. Northrup could talk about. Um, what I recall is …

Judge Alston: I guess have you seen it?

Mr. Gearin: I have, I think, I believe I have. I did not go back and look through my records but I have a vague recollection. And what I’ll tell you is that, um, I _______ the timeframe but I think it was earlier this. Mr. Hansen approached the creditors committee and tried….

Judge Alston: …and I’m going to interrupt you, make sure, because there are two people named Hansen, there’s Ross Hansen former CEO and Owner and another Hanson, H-A-N-S-O-N, who was on the committee and Mr. Martini’s letter spelled Hanson, H-A-N-S-O-N, Pell Letter, so please make sure we’re clear which Hanson you’re talking about.

Mr. Gearin: Good, good point. Alright. So, Ross Hansen, the former principal of the debtor approached the committee and sought to present a plan to the committee and I think he also met with Mr. Martini at some point, trying to get Mr. Martini to support his plan. His, um, view of the world. And as I recall, Mr. Ross Hansen’s lawyers drafted a letter that was presented the creditors committee through Bill Hanson who then was the chair of the creditors committee. Bill Hanson who has been sharing information with Ross Hansen throughout the course of the case and has subsequently resigned from the committee, um, presented that letter and sought to have some of the creditors committee members sign off on the letter and the gist of the letter was they wanted to go forward with Mr. Ross Hansen’s plan and they wanted to have Mr. Calvert removed as the Trustee. That’s the gist of the letter. So, that’s what I recall about it. I don’t think it went anywhere. I think the rest of the creditors committee, you can speak with Mr. Northrup…

Judge Alston: Right, I’ll hear from Mr. Northrup on that.

Mr. Gearin: Okay, but I think that’s the gist of that letter.

Judge Alston: Right. The other issue was, you know, the local rule that does say interim fee applications are supposed to estimate fee if, you know, tasks to be performed. And not only is it local rule but I’m going to get to your report after I finish the fee applications, but I’ll mention it now. You filed a report ostensibly to comply with your duties under, Trustee’s duties under 1106a. One of those duties is as soon as practicable file a plan, file a report why you won’t file a plan, or recommend conversion. I don’t have compliance with that and I think it dovetails with the local rule requirement of saying where do you expect to go from here. What I’m gathering, if I’m reading this correctly, you’re looking at being in Chapter 11 another two to three years…

Mr. Gearin: No, I don’t think so Your Honor.

Judge Alston: Okay, I, I maybe I misread that. I thought I read that. Mr. Calvert thinks he can turn this around in two to three years.

Mr. Gearin: No, I think what we say in the status report is that we expect sometime in the first half of next year that we would be proposing a plan, but I think that the revenues that we think would be available to pay creditors could run out for a two to three year period and then there would be a liquidation event, you know, the enterprise

value that would result in the final payment to creditors. That’s, that’s I think the intention. That may not have been clear, but I think that was what we intended to convey to the Court.

Judge Alston: Okay, well that’s a helpful clarification. I, I you know, I’m not going to hold you to the local rule, but the next time you do the fee app you’ll need to at least acknowledge it and either say you can’t comply with it or you’ll do your best.

Mr. Gearin: Under, happy to do that.

Judge Alston: Yeah, okay. Alright then, let me, let me turn to Mr. Calvert and anything you’d like to add on behalf of, I guess you can speak on behalf of Cascade Capital because K&L Gates doesn’t technically represent Cascade Capital. I think he spoke on your behalf as Trustee, so anything further…

Mr. Calvert: Thank you Your Honor. Good morning.

Judge Alston: Yes, good morning.

Mr. Calvert: I think I only have two or three points to add. I think through March 31 of 2017 we had planned to file a plan of reorganization as soon the Medallic litigation was resolved. We had a shocking event in April where the prior year had been profitable, it

was the first year that I was repeating month so I had data from the previous year thinking what it should be and I had a sales person that coordinated most of the sales to the universities that had health issues with family at home. As a result, her backlog did not come in as anticipated. We ended up firing her and she ended up going to work for a competitor, which is another issue. But the bottom line was we had planned to file a plan at that point. The shock of that number in April when it was supposed to be profitable, caused us to change directions. We immediately went into a sales mode. With the help of Cascade Capital we put together a package and we mailed out that package to in excess of 50 different potential buyers. We identified a number of parties of interest. A total of eight expressed interest in signing confidentiality agreements. Four came in and toured the plant. And we received some offers. Those offers were, um, taking into consideration the April results and therefore not very favorable. But I was forced at that point to figure out could I continue to exist to find a better offer to sell the company. I am currently in discussions with three different parties, three different parties that are talking about either buying half the company for two of them and one of them is talking about buying the whole company. Those numbers indicate a value currently of around $10 million. So when I look at this, I think we’ve done an outstanding job and with the help of Cascade in resolving the Medallic issues, doing the work along those lines, we have done an outstanding job of preserving value, enterprise value for the creditors. Now, as mentioned, I have a serious cash flow problem. And it is a fight every single day and I don’t want to misrepresent to the Court that my cash flow problems

are actually both positive and negative. When sales grow, you need more working capital. So I have gold and silver being put in certain coins and I have to go out and buy a hundred thousand dollars or two hundred thousand dollars and then I don’t make much margin on that and sell it out. So I do have a serious cash flow problem. I don’t want to deny that. But I do believe based on the sales efforts of Bill Otalla who I mentioned when we hired him. At the end of that case I looked you directly in the eye and I said I’m hiring him to grow sales. If this company can grow sales 50% of each dollar, additional dollar of sales falls to the bottom line. I have high fixed costs with the leases and other things, but every additional dollar over a million dollars falls 50% to the bottom line. So if we can grow sales we can provide a great return to creditors. That’s the focus.

Judge Alston: Alright, thank you Mr. Calvert. Appreciate that. And, to you Mr. Northrup.

Mr. Northrup: Morning, Your Honor.

Judge Alston: I should clarify at the beginning I had only required that the Trustee, Cascade Capital and K&L Gates file an application. It is customary that committee files it along at the same time. I didn’t require the committee to do so but you did. I think it’s appropriate that we all see what everyone’s doing. So…

Mr. Northrup: And I appreciate that. And I was advised that you had instructed the Trustee’s professional to file. I did call your chambers and was advised that it would be option for the committee to file or not to file. Um, but the committee would be expected to observe the response date.

Judge Alston: Yeah, just hear it all at the same…if we’re going to do it, let’s do it all at once.

Mr. Northrup: That’s standard practice, we coordinate the dates. That’s fine and the application that I filed I think will certainly be familiar to you from your days in private practice. It tracks the performance of the committee and committee counsel as laid out by Sections 11.02 and 11.03 of the Code. I don’t think there’s anything controversial about the services. I haven’t received any negative feedback or comments from Mr. Gearin.

Judge Alston: Right, I did not receive any…well, again, other than the aforementioned documents that I am not considering. But you are also not seeking approval today for the same reasons. Correct?

Mr. Northrup: Um, I am not seeking approval. I think in my application I requested allowance as would be typical but no payment until some further order of the

Court, but I’m not seeking anything today Your Honor. It sounds like the whole process is going to be postponed to a future date and that’s fine.

Judge Alston: And, and, I think you said it appropriately in that you know until we know where we’re at, because there’s going to be some, probably some objections and you’re going to need to take a pencil and a ruler and look at some of these things and until we know it’s worthwhile to go through that exercise I think that’s what you said, it’s probably not a good use of resources to go through that exercise. And I agree.

Mr. Northrup: Yeah, um. With respect to the Luke Martini letter, um, I have some sympathy for Mr. Martini. I spoke with him frequently by phone at the beginning of the case. I think he is in poor health and has some curious ideas about the legal process and claims that are not legally substantiateable. But this reference in his letter to the Hanson Pell letter, um, I believe, I can’t say this for certain, but I believe it does refer to a communication that came to me in March of this year. The reference to Pell is to Richard and Paula Pell who are husband and wife and have been very, very active as committee members. You would think that this would be an easy engagement for committee counsel. The Court has appointed the Trustee, the Court has removed the problem prior owner of the company, and there’s not even a big secured creditor in the case to fight with.

Judge Alston: And yet…

Mr. Northrup: And yet, and yet..

Judge Alston: I recognize…

Mr. Northrup: The committee, the committee has been a challenge. There are some committee members who have very strong views. And some of them frankly have been very critical of the Trustee. That to some extent is reflected in the areas of concern that I outlined in my response to the fee applications. But one of the undercurrents of this case has been that Ross Hansen has attempted to identify committee members or unsecured creditors who will pay attention to him and people he thinks he can influence and this letter, I believe, was part of that product. Ross Hansen would contact Bill Hanson and other creditors and fill the atmosphere with allegations and claims about this case and what the Trustee was doing and how at the very next hearing the judge was going to convert case sua sponte. Things that were absolutely preposterously inaccurate and false. But whenever Ross Hansen could find someone he thought he might be able to sell his message to, this message of this case was collapsing and any day now the Trustee would be removed. Again, preposterously inaccurate but this letter I think was an attempt by him through Bill Hanson on the committee to get an alternate plan for the case to the committee so the committee could support it. And again Ross Hansen’s ultimate strategy, I believe, was that he somehow would be brought back in to run the business. I think that was his ultimate goal. And

this letter was part of that. But the communications contain, again, criticisms, characterizations of the case that were just absolutely incorrect.

Judge Alston: Alright. Well, I don’t need to see the letter. I did want to, given that it was stated in Mr. Martini’s response, I felt obligated to ask about it and you’ve satisfied me as to what its contents are. Alright. Anything further then Mr. Northrup.

Mr. Northrup: No.

Judge Alston: Alright, you’re moving your seat so I’ll take that as a no. Alright, let me then give you my comments. Um, the numbers are large. That doesn’t necessarily mean they shouldn’t be approved, but a Court is always concerned when a case has been going for a while, professional fees are high, and they are not being paid. I want professionals to be paid if they are entitled to be paid and one of the obligations of the Court is to make sure that administrative expenses can be paid. So, that’s in part why we’re here today. I think also while it wasn’t required in what I call the Knudson order, the order that authorized parties to be paid on 80% of the monthly fees assuming they follow certain procedures, I think it’s a good idea and I should have put this in the order because when I was a practitioner I did, is that it actually required a fee application every six months. Now, that’s particularly important when there actually have been payments every month so you can get before the Court and get it approved and trued up. That hasn’t been the case here. I think there’s only been one payment

one month last December and I understand the timing of that. Otherwise, the parties have not utilized that tool and apparently wisely so and maybe by necessity in that there has not been cash with which to make those payments. In fact, Cascade Capital has had to return six figures if I understand the facts correctly. That all being said, 18 months into the case with that high a number I do stand by the decision to get applications in here just so we can see where the parties are going. There are some issues I have identified, better to find out what my issues are and anyone else’s issues are now rather than another 18 months from now or whenever there is an actual application for allowance payment.

I’m going to take the committee’s application first. I didn’t have much to say about this. And again I’m not making any rulings today, I’m just noting a few things so you don’t have to respond. But, you have a statement of expenses that your firm is seeking payment of $3,229 for reimbursement of expenses advanced by two members of the committee and I can’t tell if that means you paid these expenses for them or, or what. But actually I would like you to tell me. What, what are you asking for?

Mr. Northrup: Those, those, I’m trying to, I’m trying to expedite reimbursement to two committee members who incurred those charges traveling either to Seattle for committee business. I recognize that perhaps filing a motion on behalf of the committee members would be technically the correct way to seek reimbursement, but these are not attorneys. I’m trying to expedite, uh…

Judge Alston: I understand…they’re relatively…well in comparison to the professional fees it’s a tiny amount but, you know, a thousand dollars is real money to most people. I get that and I understand. Does the Knutson order cover members of the committee? Let me go back and look at it. I don’t think it does.

Mr. Northrup: I think it just covers the committee Your Honor.

Judge Alston: The professionals.

Mr. Northrup: Again this would be a situation where it would cost more to file the motion on behalf of the individual committee members than is at stake.

Judge Alston: Right. No, I understand and I’m not asking…and yet, um, alright. The Knutson order only applies to the professionals, it doesn’t even apply to the Trustee, correct? Alright. Trustee’s counsel, financial advisors to the Trustee, counsel to unsecured creditors committee are the only ones that can utilize that order. Well, I mean, you’re asking for reimbursement of those today.

Mr. Northrup: It doesn’t even necessarily have to be today Your Honor.

Judge Alston: Well, alright. Well, I’m, since I’m not granting anything today maybe you can, again these are relatively small amounts. I got to say the expenses for

Mr. James are not, that attachment’s not legible, but it’s again relatively small amounts. The only other thing I would note on the application is that there are lots emails and call with either one or the other panel and I know the committee members are active and want to know what’s going on but it costs the estate money. I’m sure you’ve said this, but I’m just saying it so you have cover. You need to tell Mrs. and Dr. Pell every time they call you it’s costing money. And they’re not chairs of the committee so, you know, keep those calls down. And I think that I’ve seen a decrease over time. Is that correct?

Mr. Northrup: Since the events of March when we lost the committee member, the committee fees have been very low.

Judge Alston: Alright. That then may address that issue. Those are the only comments I had on the Trustee’s, excuse me, the committee counsel’s application.

Mr. Gearin: Could ask on the committee expenses, would you consider a stipulated motion and order on that since it has been noted out to the creditors?

Judge Alston: Yes, yes. Let’s get an order. I get orders in Chapter 7 cases for authority to pay $200 income tax obligations, so I’ve got at least do some order I think for their protection, but given that small amount I’d like to see them paid so yeah a stipulated, I think that’s a good idea Mr. Gearin.

Mr. Gearin: Thank you.

Judge Alston: Thank you. Alright, um, on Cascade Capital’s application let’s see. As I noted, the next time you’ll need to comply with Local Bankruptcy Rule 2016-1c which says describe the tasks remaining to be done and the projection of the applicant’s future expenses and fees and the anticipated source of their payment as best you can comply. And then I echo the comments that committee raised which a lot of the entries, and I mean a lot of the entries, appear to relate to general bankruptcy work and not accounting work. That was the concern I had with employing your outfit and that’s the concern that’s expressed in the case law. And I’ll remind everyone of the case I cited way back when In Re: Butler Industries, Inc., 101 Bankruptcy 194, Bankruptcy Central District of Cal., 1989, affirmed 114 B.R. 695, see D. Cal. 1990. That dealt more with the employment of the trustee and the court sua sponte, or excuse me, without objection from any party, nonetheless refused to employ the trustee’s own law firm noting that there is an inherent conflict of interest in that the trustee is going to be…well, there are two conflicts. One, the trustee is going to be inclined to want to include his time as much as possible with his firm rather than the general time for which he is capped under Section 326. And also the trustee is tasked with reviewing the bills of his professionals and it would be difficult for him to review the bills of his own firm. Now, we have a committee here, so we do have some oversight, so that’s less of an issue, but I just note the entries on April 11, 2016, you know, Mr. Calvert arrived at 6:30 a.m. to take control, 2 hours. I don’t know how that’s accounting. And if it is you’re going to need

to tell me, but all your fees billed under the following categories strike me as administration. The category Bankruptcy Administration, Plan & Disclosure Statement, Committee, Court Hearing. I’m not sure why any of the accountants would need to attend a court hearing unless testifying. And Sale of Assets. Those are just some of the categories that get my attention when Mr. Calvert has time billed under those categories. I had noted…

Mr. Calvert: Your Honor I acknowledge that issue and I welcome the opportunity to review it with the committee line by line and resolve any differences there might be. It’s not a problem.

Judge Alston: Well, as you heard from the earlier matter this morning, you may reach resolution with the committee but the Court has an independent duty. So you need to, that’s a good start and as I said having the committee check is a good development we have here. Normally you wouldn’t have a committee and a Chapter 11 Trustee, but yes that’s something I’d like for you to do. Probably better to do it now, so that you know what the committee’s view is on some of these things so you can proceed accordingly going forward.

With regard to your expenses, you’ve got $20,000 for outside data entry without explanation. Local bankruptcy rule requires an explanation for the necessity of the expense. Cascade paid $2,659 to Amicus Law Group. No explanation. So

those are, you don’t need to give them to me today, just need to explain them in your application.

Um, turning to your application as Trustee, Mr. Calvert. Again, you need the description of the tasks remaining. The committee noted that your application is subject to the cap, which your application does not seem to acknowledge. It spent some time explaining your hourly rate which is not really relevant because you are paid based upon a formula that depends upon monies disbursed. And I gather you’re going to argue that the return of the non-estate items to customers constitutes monies disbursed. You should look at In Re: Ha______ Square, Inc., 460 Bankruptcy 763. That’s Bankruptcy Appellate Panel Ninth Circuit 2011, which held that a trustee’s delivery of property to a secured creditor who credited its debt did not constitute monies disbursed. So I’m not sure how you are going to argue that the property you’ve delivered that didn’t belong to the estate somehow constitutes monies disbursed. So, again, you may think otherwise, but so you’re not surprised, I’m looking at that issue. You also have money billed to Amicus Law Group. Small amount but not sure what legal advice you’re obtaining separately. If someone else is provided legal advice to the Trustee, I need to know about that. And they’re certainly not going to get paid. Mr. Calvert: Can I answer that?

Mr. Gearin: Well, Amicus Law Group is actually Mr. Calvert’s personal tax lawyers and we’ve had a conversation about that. I think we can resolve the issues of whether they should bill I think to the estate, but he had a consultation with them regarding some of the planned tax issues. Those were those consultations, but I acknowledge that we’re going to have to address in the subsequent fee application as to whether or not we either come and ask to have them employed and compensate them directly or whether we strike those entries and not seek reimbursement for them, Your Honor. And as you said, they are frankly de minimis numbers.

Judge Alston: Well, they are de minimis, but you know, I’ve said this, I know I sound like a broken record. This case in particular requires parties to follow the rules to the letter. And I see a law firm that’s not been approved in the expense category.

Mr. Gearin: Your Honor, I think we can dispense with it because I think I’ll tell you we’ll strike them. There will not be a ______________.

Judge Alston: You’ve got a thousand lawyers in your firm. I’m pretty sure you’ve got a tax lawyer or two at K&L Gates.

Mr. Gearin: We do and we have consulted with some, so I acknowledge Your Honor. So I think we can do away with it and it will not be in the final application.

Judge Alston: I think we probably spent more time on it but again I don’t like seeing that. Um, and also you, you’ve been reimbursed $24,000 in ordinary course travel expenses. Um, can you do that?

Mr. Gearin: Your honor I think so…

Judge Alston: I mean again it’s not huge numbers and I don’t like people not being paid, but you don’t – I think you need to get permission to reimburse yourself and by the way the travel expenses are not $24,000, they are $15,350. If anyone doesn’t know by the end of this morning, I look at the numbers. And when people say things that are not borne out by the numbers, particularly an accountant, I’m going to call you out on it. And you said that you’ve been reimbursed $24,000 in ordinary course travel expenses and Exhibit D showed travel expenses are $15,350. I don’t understand the discrepancy. It’s not huge but it’s…

Mr. Gearin: I think, I think the difference Your Honor, I think the $24,000 is those were expenses where Mr. Calvert was traveling like an executive like other executives are flying to Dayton and in a working business operations in Nevada and I believe the $15,000 is, uh, non-business related travel expenses. So, I think those we were attending to apply for were the $15,000 but the $24,000 as my recollection, those were viewed as ordinary course and business expenses for the Trustee’s travel back and forth to various locations for business purposes.

Judge Alston: Just take a look and make sure that you get the numbers correct.

Mr. Gearin: Understood.

Judge Alston: But, um, …

Mr. Gearin: Could I address the cap issue real quickly Your Honor?

Judge Alston: Yes.

Mr. Gearin: So, our intention I think we did, uh, we neglected to actually put a cap calculation in the Trustee’s application and we should have done that. We did put in the record the calculation of the disbursements and I don’t think that does include return of inventory. Those are operational disbursements. Those are roughly a million dollars a month is what the estate is extending paying salaries and trade creditors and so forth Your Honor in the course of the case. So I don’t think that the inventory return is included in that. If I’m wrong about that, apologies. I don’t think it was intended. But, we do acknowledge in our reply that the Trustee’s compensation is capped and we intended that there would be a calculation of that cap number.

John Alston: Um, page 2 of Mr. Calvert’s Declaration in Support the application for Trustee, paragraph 6 – “My total operating expenditures and disbursements in this case between April 11, 2016 and July 31, 2017 is approximately $20.8 million. This includes the value of the precious metals I have returned to certain storage customers.” Then I think Mr. Northrup noted that as well, so again I’m not going to make any decisions today, I’m flagging things that are of concern to me that, so you’re not surprised. And maybe I should have ordered this six months ago, because again I’m concerned the parties are proceeding down a path. I want to see professionals paid but I want everyone to be on the same page as to what’s appropriately compensated. So that’s how I read it and that may not be the case. I have not gone back and looked at the monthly reports, but that’s, I, I got the same thing that Mr. Northrup got which is you seem to be counting the disbursements to include the return of non-estate property to storage customers, which I think under the Hokalani Square case would not count as monies disbursed. So, yeah, you didn’t calculate the cap and the proposed order refers to 330 not Section 326. Those are my comments on the application of Mr. Calvert as Trustee.

And then with regards to the K&L Gates application, I echo all of the comments that committee raised in its response. In addition, under your claims administration objections K&L Gates analyzed and addressed admin claims by the seller of the Texas Tomball assets and sough to obtain approval of a compromise of those claims. Neither of you have been here. You have sent Mr. Peterson, but I’m sure he has conveyed to you the Court’s extreme displeasure with how that all went down. So, you’re going to

need to tell me why you should be paid for pursuing what I thought what was a doctored and phony dispute. Don’t need to answer that today, but I told Mr. Peterson, it’s on the record, you sought to settle a phony dispute and then presented a sweetheart settlement deal and I have denied them both. So, you’re going to need to address that.

Mr. Gearin: I would like to address it.

Judge Alston: Okay, go ahead.

Mr. Gearin: Ten seconds, right?

Judge Alston: Sure.

Mr. Gearin: I think you do have a misunderstanding and I think we would welcome the opportunity to come back and talk to you about it and I think we should probably find an avenue, maybe this is a good avenue to do this.

Judge Alston: I actually set a hearing, required you to provide me the emails and instead you presented the settlement. So, you had the opportunity and you chose not to take it and instead presented a settlement agreement that I denied because I think you misrepresented the consideration to be exchanged, understated what the estate was

getting and over stated the other way around. So, um, yeah, you’ll get a chance, but it’s not today.

Mr. Gearin: Alright. Understand Your Honor.

Judge Alston: But, I’m alerting you to that. That’s unresolved. There will be a day where I get closure on that.

Mr. Gearin: Okay.

Judge Alston: We’re not there yet.

Mr. Gearin: We’d like to do that.

Judge Alston: Um, fees incurred to litigate the right to the Dayton lease. As you know from my written decision, I have serious concerns as to why $750,000 was spent litigating with a large amount of that devoted to seeking assumption of the Dayton lease when you had the right, the ability to go somewhere cheaper and save a bunch of money. Now you may disagree, but that is again something you’re going to need to, you’re going to need to break out for me the monies devoted to litigating the Dayton lease. And those can be broken out because you did an extensive summary judgment motion, um, yeah there were other parts of the Medallic litigation that were not related

to the lease, I get that, and you needed to deal with that. But the right to the Dayton lease I’m troubled by those expenditures and it was in part those costs that led the Court to require these fee applications.

Also on your relief from stay, fees again related to the motion brought by the Tomball, Texas landlord for relief from stay. For the same reasons I still have some concerns about all of the relationships, communications, what went down with the Texas, Tomball, Texas landlord, and the litigation trying to find Mr. Hansen in contempt which, or for violation of the stay, which I denied. And I’m not making a final ruling on it today, but you’re going to have a little higher bar to tell me why those should be compensable. And also under the category Assumption and Rejections of Leases, that the monies spent to assume the Dayton, Nevada lease for the reasons I’ve already stated. So, don’t want to belabor that point. But, those are some of the concerns I have that were not raised by, raised directly by the committee.

So, um, if I have a misunderstanding I’ll be the first to acknowledge that. I do need some clarification on those items. But today is not the day. Alright, that ends the discussion on the fee applications. Let’s turn to the report that you filed.

So I guess I’ll turn to you Mr. Gearin. Um, why was this prepared now?

Mr. Gearin: Your Honor we’ve actually been working on this report for a while.

Judge Alston: Okay.

Mr. Gearin: I think we did think that it would be helpful and informative to the Court in connection with your request, your instruction to file these fee applications, because we thought that you were looking, part of what you were looking for was where is this case.

Judge Alston: Correct.

Mr. Gearin: And why is there benefit being conferred from the large amount of fees that have been incurred thus far? So we thought that he framed that out and was instructive and helpful, to be helpful to the Court, and we also took guidance from you in suggesting that the creditors were looking for information and so we wanted to post this up on the web site. There are a number of questions that are being asked of the creditors’ committee and we are receiving calls as well as to what the status is. We thought this was an appropriate time to put this in front of the creditors to give them some detail and some information about status.

Judge Alston: Okay, so, the timing was related to the fee application?

Mr. Gearin: In part Your Honor. In part. I think we thought that it would be useful in trying to have an understanding of what benefit was being conferred.

Judge Alston: Alright then. The problem I have is this is not an objective report. You can’t really think that his is an objective report. It is, it is filled with allegations, many of which are very severe, unproven. It contains allegations that you’ve litigated that were not proven. I ruled against you. It contains representations that are not true. And while 11.06A, 3, 4 and 5 instruct the Trustee to file reports about the acts of the Debtor, the conduct, assets, liabilities, potential investigation of fraud, dishonesty, incompetency, misconduct, mismanagement…you got the allegations of fraud and mismanagement in spades here. I mean this is basically a personal attack on Ms. Erdmann and Mr. Ross Hansen. But the balance of it is explaining all your victories and all the great things you’ve done. But there’s zero balance, because you’ve had setbacks. I’ve made rulings against you. The rulings are not on the web site are they? The rulings that said you lost the litigation with Ms. Erdmann over the fee deposit. That on the web site?

Mr. Gearin: I don’t think there are any of your rulings that have been posted on the web site to my knowledge, no.

Judge Alston: But you put this on the web site.

Mr. Gearin: We did put the status report on the web site.

Judge Alston: So when you say on page 6 in great detail about how Ms. Erdmann was seen taking items out of the vault and then several days later she deposited, gave a $150,000 to former debtor’s counsel, the direct implication is that took the money from the vault and used it to pay the fee deposit, right? Isn’t that what you’re implying on page 6?

Mr. Gearin: I don’t think we’re trying to imply anything Your Honor. I think we are reciting facts. I think we are laying out what we believe are verifiable facts.

Judge Alston: But, but the implication is that those monies that came from items she took on March 27th, we had a two day trial and I ruled that you didn’t prove that. And that’s a fact. That’s not in your report. So it’s misleading. And that’s number one.

Number two, page 9. You talk about the sale to the Tomball, Texas assets. You say the Trustee obtained court approval for the sale price of $1 million. That’s true. But then later on in that paragraph you say because of the acts of Mr. Hansen, the Trustee was compelled to conduct an auction. It was the auction that jacked up the price to a million dollars. The original buyer wasn’t paying a million dollars. So, the implication is that somehow…I mean you say the Trustee was compelled to conduct an auction. What does that mean? Okay? Um, there’s a lot of here, patting, I don’t know how to describe it, patting yourself on the back about all the things that the Trustee has done. That same page 9, you go into all of the intentional, destructive interference by Mr. Hansen. Again, we had a hearing in which you sought to hold him in contempt for

violating the stay and I denied it. I ruled against you. Twelve page transcript that’s on the docket. That’s not on the web site and not referenced here. If this was a disclosure statement, I wouldn’t approve it. Because it’s not accurate. It’s … the statements that the debtor is insolvent are opinions. I decide if the debtor is insolvent. You can say, in your opinion, the Trustee has determined it, but this is troublesome. And the reason I am really troubled here is I went back and looked at the first hearing we had in this case on April 28 and I said I am greatly concerned about what’s on the web site, because people think you speak for me, Mr. Calvert. And I was this close, let the record reflect my fingers are close together, to saying yank the web site because you are putting improper and inappropriate things on there. Mr. Gearin talked me out of that and I said, fine, but the web site better be as plain vanilla as it can possibly be. And then comes this. This is a report that appears to be a report from the Court. People are going to think that the Court authorized this. And I did not. Mr. Gearin: Your Honor, I didn’t, that’s certainly not the intention, right? And I think we do, uh, it specifically says it’s the Trustee’s report of investigation. It doesn’t say that it’s court approved. It doesn’t, I don’t think, infer that the Court’s had any effort to approve it or consider it.

Judge Alston: Mr. Gearing. That’s, that’s understood. You and I understand that. I said though that not everyone’s going to see it that way. And read Mr. Martini’s letter. I’m not saying he’s a rational person, that letter is over the top and ridiculous, but there

are people that think that Mr. Calvert speaks for the Court. And, in fact, he is an officers of the Court. And I told him, I told you that you were not to put anything on the web site other than just the facts, ma’am. This is not that. This is a vituperative attack on the one hand and on the other hand it is saying how great and how many victories you’ve had without any mention that you’ve had some setbacks. And even your victory against the Dayton landlord was filled with some, I’m sure, rulings that you are not happy with and I’m sure also, while you’ll tell everyone you won, it’s not on the web site, is it?

Mr. Gearin: Your Honor if you want us to post your rulings on the web site, I’m very happy to do that. We’re happy to do that.

Judge Alston: I’m not, I’m not going to micromanage the web site. It’s either, if I can’t trust you to do the web site, then I think the option is to not have a trustee to run the estate. Okay? So, um, I thought about requiring you to move to seal, but you know, I get disclosure statements that read like this all the time in individual Chapter 11s and it’s usually an individual debtor that has been wronged or feels that he or she has been wronged by the system and the first draft of the disclosure statement that gets submitted is about how everyone has done them wrong. And I say, that’s fine. You now have got that out. Now, get me a disclosure statement that talks about facts. But I don’t ask them to seal the offensive disclosure statement. So, I’m not going to ask you to seal it. Um, and I’m not going to tell you what to post on your web site. But I’m sure

it’s plainly clear, I am deeply unhappy with this report. You’re not complying with the Rule 11.06 duties. You would have filed this a long time ago, most everything is in reference to events in 2016. This was done clearly to justify, you’ve acknowledged it, to justify your fees and that’s not what 11.06A is about. That’s all I have.

Thank you everyone.

Mr. Gearin: Thank you, Your Honor.

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