IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE

In Re
CHARTER BEHAVIORAL HEALTH
SYSTEMS, LLC, et al.,
Debtors and Debtors-in-Possession.

Case Nos. 00-00989 (RRM)
through 00-01089 (RRM),
00-10555 (RRM), and 00-02231
(RRM) through 00-02237 (RRM)
Jointly Administered
Chapter 11

--------------------------------------------------------------------------------------------------------------------

DEBTORS' MOTION FOR ORDER APPROVING THE STIPULATION OF SETTLEMENT WITH WARN ACT CLAIMANTS, CRESCENT REAL ESTATE EQUITIES COMPANY, CRESCENT REAL ESTATE EQUITIES, LTD., CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP, CRESCENT OPERATING, INC. AND THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF THE DEBTORS

TO: THE HONORABLE RODERICK R. McKELVIE

UNITED STATES DISTRICT JUDGE

Charter Behavioral Health Systems, LLC, and its related debtor entities, the debtors and debtors-in-possession herein (the "Debtors"), hereby move the Court for entry of an order approving a Stipulation of Settlement(1) (the "Settlement") with Class Counsel for the WARN Act Claims, Crescent Real Estate Equities Company, Crescent Real Estate Equities, Ltd., Crescent Real Estate Equities Limited Partnership (collectively, "Crescent"), Crescent Operating, Inc. ("COPI"), and the Official Committee of Unsecured Creditors in the Debtors' cases (the "Committee"). In support of this Motion, the Debtors respectfully state as follows:

INTRODUCTION

1. On February 16, 2000 (the "Original Petition Date"), 101 of the Debtors (the "Original Debtors") filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code, thereby becoming debtors-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code. On February 17, 2000, the Court entered an order authorizing the joint administration of the estates of the Original Debtors. On April 4, 2000 and June 6, 2000, the remaining eight Debtors (the "Additional Debtors") filed for relief under Chapter 11 of the Bankruptcy Code, thereby becoming debtors-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code. On August 9, 2000, the Court entered an order authorizing the joint administration of the estates of the Original Debtors with the estates of the Additional Debtors.

2. No trustee or examiner has been appointed in any of these cases. The Committee was duly appointed.

3. The Court has jurisdiction over this Motion pursuant to Sections 157 and 1334 of Title 28 of the United States Code. Venue of these proceedings and the Motion is proper in this District pursuant to Sections 1408 and 1409 of Title 28 of the United States Code.

SUMMARY OF THE SETTLEMENT

4. This Settlement addresses a number of issues including the following:

(a) resolution and payment of former employee alleged claims under the Workers Adjustment and Retraining Notification Act 29 U.S.C. 2101 et seq. (the "WARN Act");

(b) resolution of various other claims of former employees, including 401(k) claims;

(c) payment of WARN Class Counsel Fees from funds set aside to pay WARN claimants;

(d) settlement and release of claims between and among the Debtors, COPI, Crescent and the Committee;

(e) creation of a preference amnesty program for creditors;

(f) Crescent/COPI's agreement to fund approximately $3.0 million towards payment of pre-petition WARN claims;

(g) subordination of Crescent's pre-petition claims of approximately $40.0 million to all other pre-petition claims; and

(h) establishment of a likely distribution to general unsecured creditors by a allocation of a portion of funds that would otherwise be payable to priority unsecured creditors.

5. As previously stated, the Settlement is multi-faceted and this Motion ONLY provides a broad summary of the terms of the Settlement; it may exclude details that may be important to you. A copy of the complete Settlement is on file with the Court and may be obtained over the internet. ALL PARTIES INTERESTED IN UNDERSTANDING THE COMPLETE TERMS OF THE SETTLEMENT ARE URGED TO CONTACT AN ATTORNEY AND TO REVIEW THE SETTLEMENT AGREEMENT IN DETAIL.

RELIEF REQUESTED

6. By this Motion, pursuant to Federal Rule of Bankruptcy Procedure 9019(a) ("Rule 9019"), the Debtors seek entry of an order approving the Settlement. Two copies of the Settlement are being filed simultaneously with the Court; a complete copy under seal with the Court and redacted copy on public file.

FACTUAL BACKGROUND

7. As of the Original Petition Date, the Debtors were operating 36 behavioral healthcare facilities in about 21 states, as well as behavioral outpatient clinics in several states. The Debtors also provided management services for about 15 behavioral healthcare treatment programs in general acute care hospitals in eight states. The Debtors leased most of the underlying real estate facilities and equipment from Crescent.

8. Since the Original Petition Date, the Debtors have sold or closed all of their facilities and are in the process of liquidating their remaining assets (i.e., pursuit of accounts receivable and preference claims) and fixing their liabilities.

9. In order to further the liquidation process, the Debtors, pursuant to a Court order, established December 1, 2000 as the final date to file claims, including post-petition claims in the Debtors' cases (the "Bar Date"). Since the Bar Date, the Debtors have diligently been working through the over 13,000 claims that have been filed.

10. As the Court is aware, some of the Debtors' former employees have asserted, through various procedural vehicles, WARN Act Claims based upon the Debtors' purported violations of the WARN Act in closing their facilities. In this regard, Class Counsel has filed in the Debtors' cases (a) a class proof of claim under the WARN Act on behalf of Pre-Petition Class Members, (b) a class adversary proceeding under the WARN Act on behalf of Pre-Petition Class Members, and (c) an Administrative Class Claim under the WARN Act on behalf of the Post-Petition Class Members.

11. In addition, Class Counsel filed the Sweeney Class Action in the District Court (Civil Action No. 00-674), contending that Crescent and COPI are liable under the WARN Act for the Debtors' closure of their facilities. After the filing of this Motion, a motion will be filed in the District Court in the Sweeney Action and in this proceeding for certification of a settlement class, for appointment of class counsel, for approval of notice dissemination plan and for final approval of the class settlement by the District Court and Bankruptcy Court.

12. The Debtors, Crescent, and COPI have denied any wrongdoing or liability of any kind under the WARN Act and have raised numerous defenses.

13. Moreover, the Committee has (a) asserted that there are certain claims against the officers and directors of Crescent, COPI, and the Debtors, (b) filed an adversary proceeding against Crescent alleging certain improprieties with respect to a $10 million loan Crescent made to the Debtors, and (c) filed an appeal of this Court's order granting Crescent a release of all claims by the Debtors.

THE DEBTORS' PLAN OF LIQUIDATION

14. On or about January 1, 2002, the Debtors are expected to file their plan of liquidation to effect the terms of the Settlement. This Settlement will be a key element of the Debtors' subsequent plan of liquidation in at least five ways:

(a) it will govern the distribution of millions of dollars in bankruptcy estate funds;

(b) it will allow as valid and timely millions of dollars in pre-petition and post-petition WARN Act Claims against the bankruptcy estates;

(c) it will effectively assign a portion of the pre-petition, priority WARN Act distribution to the benefit of general unsecured creditors;

(d) it will allow as valid and timely millions of dollars of claims filed by Crescent (some or all of which may be categorized as secured or super-priority or both); and

(e) it will establish a mechanism whereby creditors who might be liable to the bankruptcy estates for preference liability can obtain a release from the estates for that liability if they properly and timely opt to waive all of their claims against the estates.

ANY PARTY WHO RECEIVES NOTICE OF THIS SETTLEMENT AND FAILS TO OBJECT TIMELY WILL FOREVER WAIVE ANY RIGHT TO OBJECT THE SETTLEMENT'S INCLUSION IN ANY PLAN OF LIQUIDATION SUBSEQUENTLY FILED BY THE DEBTORS.

KEY TERMS OF THE SETTLEMENT

15. The Settlement is a global resolution of many issues and claims. Some of the key provisions are as follows:

The Resolution of Former Employee's Alleged Claims under the WARN Act.

16. Upon the approval of the Settlement, the Debtors will adjudicate each Claimant's (former employee of the Debtors) WARN Act Claim as follows:

(a) the Debtors will file a report (the "PENTA Report") detailing the amount of each Claimant's administrative WARN Act Claim as well as each Claimant's Pre-Petition WARN Act Claim along with the relative priority of each pre-petition WARN Act Claim;

(b) the Debtors will seek an order from this Court granting the Debtors authority to conditionally allow (notwithstanding the Bar Date) Pre-Petition WARN Act Claims, including the priority of such claims, and Post-Petition WARN Act Claims and to disallow unconditionally the WARN Act Claims of Claimants who do not have WARN Act Claims as set forth on the PENTA Report or who have asserted claims in excess of that set forth in the PENTA Report;

(c) the Debtors will mail to each Claimant a notice of the conditional amount, if any, of the Claimant's WARN Act Claim and provide each Claimant an opportunity to object the amounts or priorities set forth on the PENTA Report;

(d) if the Claimant fails to object timely to his or her WARN Act Claim as set forth in the PENTA Report, the Claimant's WARN Act Claim as specified in the PENTA Report will be conditionally allowed in that amount and priority if the Settlement becomes Final and if the Claimant does not Opt-Out, except that the Claimants' WARN Act Claims shall be unconditionally disallowed and final as to those Claimants who are shown by the PENTA Report to have no WARN Act Claim;

(e) if a Claimant objects to the amount or priority (or disallowance) of his or her conditional WARN Act Claim as set forth in the PENTA Report, such objection shall be resolved through the claims objection procedures in this Court; and

(f) if a Claimant does not timely object to the amount and priority of his or her WARN Act Claim listed in the PENTA Report, such Claimant's WARN Act Claim shall be allowed in the amount and priority set forth in the PENTA Report only upon (1) the Settlement becoming Final and (2) such Claimant not Opting-Out of the Class, except that the Claimants' WARN Act Claims shall be unconditionally disallowed and final as to those Claimants who are shown by the PENTA Report to have no WARN Act Claim.

The Payment of Former Employee Claims for Purported WARN Act Violations.

17. This Settlement establishes the following five accounts of funds to pay, pursuant to a subsequently approved plan of liquidation, the purported WARN Act Claims and the other claims against the estates:

(a) Administrative Fund - Used to pay all administrative WARN Act Claims in a total amount (including all related taxes) not to exceed $2,000,000.00. The Debtors will use the estate's money to fund this account and believe this fund will pay 80% or more of the total administrative WARN Act Claims before the payment of any counsel fees that may be awarded Class Counsel by the Court. In the event of a funding shortfall, administrative WARN Act Claims will be paid pro rata and any unpaid WARN Act Claims of post-petition WARN Act Claimants will be treated as general unsecured claims and paid pro-rata with other general unsecured claims;

(b) FUND A - Approximate funding of $3.7 million from third parties or the assignment of third party claims. These moneys shall be paid, pro rata, to the Pre-Petition Settlement Class Members, after payment of taxes and Class Counsel Fees;

(c) FUND B - Funded by excess proceeds from the estates in an amount estimated to be between $3.0 and 3.5 million, assuming such funds are available. After payment of Class Counsel Fees, these moneys will be distributed, pro rata, to all of those claimants holding pre-petition  507(a)(3) priority claims against the estates. For this purpose, any WARN priority claim will be treated as a  507(a)(3) priority claim;

(d) FUND C - Subordinate to FUND B and funded by excess proceeds from the estates in an amount equal to the remaining  507(a)(3) claims, assuming such funds are available. In this fund, the WARN Act Claimants essentially assign 40% of their right to the priority distribution to the general unsecured non-WARN creditors. After payment of Class Counsel Fees, the remaining 60% of the WARN portion of Fund C will be distributed, pro rata, to all of those claimants holding pre-petition 507(a)(3) priority WARN claims against the estates. The WARN Act Claimants' unsecured, non-priority claims, however, will be increased by the amount of the distributions to the general unsecured claimants from this FUND C; and

(e) FUND D - Remaining moneys of the estates available for distribution to creditors after payment of administrative expenses, Class Counsel Fees, taxes, the other four funds contemplated by the Settlement, the other pre-petition 507(a) priority claims, and an initial distribution of $3 million to general unsecured creditors other than the unsecured claims of post-petition WARN Act Claimants. This fund shall be divided between the post-petition unsecured WARN Act Claims and the remaining general unsecured claims on a 60/40 basis respectively, until the post-petition unsecured WARN Act Claims are paid in full with any balance to be paid to the remaining general unsecured creditors.

The Resolution of Various other Claims asserted by Former Employees.

18. This Settlement directs the Debtors to pay the accrued post-petition matching contribution to the 401(k) Plan pro rata with other administrative expenses. The Debtors are also directed to pay the unpaid pre-petition 401(k) liability in accordance with the priorities established under the Bankruptcy Code and in accordance with this Settlement. The Settlement also permits the Debtors to resolve other employee claims, such as unpaid vacation pay, as it executes its responsibilities under this Settlement. In this regard, the Debtors must notice each employee as to the amount of such employee's purported claim and each employee must have the opportunity to object.

The Payment of Class Counsel Fees.

19. The fees and expenses incurred by Class Counsel shall be paid solely from the moneys set aside in the funds to pay WARN Act Claims. No payment shall be made until Class Counsel's fee requests are approved by the Court. All such payments shall be deemed for the benefit of settlement Class Members.

The Settlement of Claims between and among the estates, Crescent, and the Committee.

20. On the approval date of this Motion, Crescent agrees to subordinate its pre-petition general unsecured claim (approximately $40.0 million) to all other pre-petition general unsecured claims and the Committee agrees to dismiss its appeal and adversary proceeding with respect to Crescent. The Settlement allows Crescent's and COPI's other claims in the priority and amounts set forth in detail in exhibits attached to the Settlement.

The Creation of a Preference Amnesty Program.

21. Under the Settlement, the Debtors have agreed to offer amnesty for preferential transfers to all creditors holding claims against the estates. The Debtors will notify each such creditor in writing of its right to elect the amnesty as well as the amount of the alleged preference. In order to elect amnesty, the creditor must waive all of its claims against the estates. If a creditor fails to elect preference amnesty timely, the election will be forever waived.

The Release of Claims Between the Parties to the Settlement.

22. The Debtors' execution of its responsibilities under the Settlement will be deemed a release of any further liability to the WARN Act Claimants that participated in this Settlement. In addition, upon the approval date of the Motion, the Debtors and the Committee will release Crescent, and COPI and the Debtors' former shareholders, officers and employees of all claims.

The Release of WARN Claims Against Crescent and COPI.

23. All WARN Act Claims asserted against Crescent and/or COPI will be deemed released, except as to those class members who ultimately opt-out of the Settlement in accordance with a notice that will subsequently be given.

Right of Crescent and COPI To Terminate the Settlement.

24. Crescent and COPI will have the right to terminate the Settlement if participation in the Settlement falls below certain criteria. Such criteria will not be made public and will be filed under seal with the Court.

The Settlement is Conditioned on Class Certification.

25. The Settlement is conditioned on the District Court certifying the Class and Approving the Settlement in the Cathleen Sweeney, et al. v. Crescent Real Estate Equities Company, et al., Case No. 00-674 (RRM) (D. Del.) lawsuit and the Joann Allen, et al. v. Charter Behavioral Health Systems, LLC, Adversary No. A-0-562 (RRM) (Bankr. D. Del.) lawsuit.

BASIS FOR RELIEF REQUESTED

26. As this Court stated in re Marvel Entertainment Group, Inc., 222 BR. 243, 249 (D. Del. 1998), "Bankruptcy Rule 9019(a) provides that the court may approve a compromise or settlement 'on motion by the trustee and after a hearing on notice to the creditors, the United States trustee, the debtor and indenture trustees.'" (quoting Rule 9019). See also, e.g., Official Unsecured Creditors' Committee v. Pennsylvania Truck Lines, Inc. (In re Penn Truck Lines, Inc.), 150 B.R. 595, 598 (E.D. Penn. 1992), aff'd, 8 F.3d 812 (3d Cir. 1993); In re Resorts International, Inc., 145 B.R. 412, 452 (Bankr. D.N.J. 1990). Based upon Section 1107(a) of the Bankruptcy Code, the Debtors possess the same rights as a trustee does to compromise or settle controversies. See, e.g., In re Grant Broadcasting of Philadelphia, Inc., 71 B.R. 390, 396 n. 4 (Bankr. E.D. Penn. 1987).

27. Whether a court should approve a settlement depends on several factors, including the probability of success in the litigation, the complexity of the litigation, the attendant expense and delay, and the interest of creditors. Marvel Entertainment, 222 B.R. at 249; Penn. Truck Lines, 150 B.R. at 598; Resorts International, 145 B.R. at 451. Application of these standards allows the Court to determine "whether the Settlement falls below the lowest level in the range of reasonableness." Penn. Truck Lines, 150 B.R. at 598. Generally, a settlement proposed by a trustee will be approved as long as it clears this threshold of reasonableness. As applied herein, the relevant factors demonstrate that the Settlement is fair and reasonable and in the best interests of the Debtors' bankruptcy estates, their creditors and other parties in interest.

28. In connection with the analysis of whether to enter into the Settlement, the Debtors have taken into account: (a) the probability of success on the involved claims if litigated to a conclusion; (b) the complexity, expense, inconvenience and attendant delay arising out of such litigation; (c) the best interests of the bankruptcy estates; and (d) the paramount interests of the various creditor constituencies.

Probability of Success in the Litigation

29. The issues resolved by the Settlement include, among other things, the purported WARN Act liability of the Debtors, Crescent and COPI. Given the complex nature of the parties' potential WARN Act liability, the uncertainty of litigation, and the time value of money, the Debtors believe that the Settlement is in the bests interests of their estates, creditors and other parties in interest.

The Complexity of the Litigation and the Attendant Cost and Delay

30. The Debtors believe that any litigation would be complicated, protracted and diligently pursued by Class Counsel. The Debtors believe that the potential litigation costs to their bankruptcy estates likely would be measured in the millions of dollars.

The Interests of the Debtors' Estates and Creditors

31. It is in the best interests of the Debtors' bankruptcy estates and creditors to implement the Settlement. The anticipated Settlement would cap the Debtors' potential Post-Petition WARN Act Claim exposure at $2.0 million, includes approximately $3.0 million contributed by Crescent / COPI for payment of WARN claims, subordinates general unsecured Crescent claims, results in an earlier payout to general unsecured creditors, and settles potential expensive, protracted litigation. The Debtors strongly believe that the certainty and expediency of the Settlement outweigh the potential benefits of litigating with Class Counsel over the Debtors' potential WARN Act liability.

NOTICE

32. Notice of this Motion has been provided to the Office of the United States Trustee, counsel for Crescent and COPI, counsel for the Committee, all parties having requested notice in these cases, and all creditors and parties interest including former employees of the Debtors. The Debtors submit that such notice is sufficient under the circumstances and that no other or further notice is required.

CONCLUSION

WHEREFORE, the Debtors respectfully request, based upon the foregoing, that the Court enter an order granting this Motion and approving the Settlement, and grant such other and further relief as this Court deems just and proper.

Dated: August _____, 2001
Wilmington, Delaware

PACHULSKI, STANG, ZIEHL, YOUNG & JONES P.C.

By:_________________________________
Laura Davis Jones (# 2436)
North Market Street, Suite 1600
Wilmington, Delaware 19801
302/652-4100

AND

Ezra H. Cohen, GA Bar #173800
Douglas E. Ernst GA Bar # 249956
Harris Bryan Winsberg, GA Bar #770892
TROUTMAN SANDERS LLP
Peachtree Street, N.E., Suite 5200
Atlanta, Georgia 30308-2216
404/885-3000

ATTORNEYS FOR DEBTORS

 

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE

In Re
CHARTER BEHAVIORAL HEALTH
SYSTEMS, LLC, et al.,
Debtors and Debtors-in-Possession.

Case Nos. 00-00989 (RRM)
through 00-01089 (RRM),
00-10555 (RRM), and 00-02231
(RRM) through 00-02237 (RRM)
Jointly Administered
Chapter 11

--------------------------------------------------------------------------------------------------------------------

ORDER GRANTING DEBTORS' MOTION FOR ORDER APPROVING

THE STIPULATION OF SETTLEMENT WITH WARN ACT CLAIMANTS, CRESCENT REAL ESTATE EQUITIES COMPANY, CRESCENT REAL ESTATE EQUITIES, LTD., CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP, CRESCENT OPERATING, INC. AND THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF THE DEBTORS

Upon consideration of the Debtors' Motion for Order Approving the Stipulation of Settlement with Class Counsel for the WARN Act Claims, Crescent, COPI, and the Committee Pursuant to Federal Rule of Bankruptcy Procedure 9019(a) (the "Motion"); and due and adequate notice having been given under the circumstances; no other notice needing to be given; and it appearing that the relief requested is in the best interests of the Debtors' estates, their creditors, and other parties in interest; and after due deliberation and sufficient cause appearing therefor; it is hereby

ORDERED, that the Motion is GRANTED; and it is further

ORDERED, that the Settlement, as such term is defined in the Motion, is APPROVED, and the Debtors are authorized to take any action necessary to effectuate the terms of the Settlement and executed any documents necessary to implement the Settlement.

IT IS SO ORDERED.

Dated: , 2001

Wilmington, Delaware

Hon. Roderick R. McKelvie

1.

1 Capitalized terms used herein will have the same meaning as set forth in the Settlement.