CERTIFICATE OF SERVICE

I, Christopher M. Samis, hereby certify that a true and correct copy of the foregoing
Alleged Debtors' Response to Petitioning Creditors' Motion Pursuant to Del. Bankr. L. R. 90061 (e) for an Order Shortening Time for Notice of the Hearing to Consider the Expedited Motion of Petitioning Creditors for the Appointment of a Trustee Pursuant to 11 US. C. 105(a), 1I 04(a)(I) and II 04(a)(2) was served upon all parties in interest, by first class mail and/or hand

delivery on May 21, 2012, at the following addresses:

BDCM Opportunity Fund II, LP One Sound Shore Drive Suite 200 Greenwich, CT 06830 Black Diamond CLO 2005-1 Adviser L.L.C. One Sound Shore Drive Suite 200 Greenwich, CT 06830 Spectrum Investment Partners LP 1250 Broadway 19th Floor New York, NY 10001

United States Trustee 844 King Street, Room 2207 Lockbox #35 Wilmington, DE 19899-0035 Adam G. Landis, Esq. Kerri K. Mumford, Esq. Landis Rath & Cobb LLP 919 Market Street Suite 1800 Wilmington, DE 19801 Counsel to Petitioning Creditors

RLFI 604674lv.2

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: ALLIED SYSTEMS HOLDINGS, INC., Alleged Debtor. Chapter 11 Case No. 12-11564 (CSS)
Re: Docket No. 12

In re:

Chapter 11 Case No. 12-11565 (CSS)

Re: Docket No. 12 Hearing Date: TBD Objection Deadline: TBD

ALLIED SYSTEMS, LTD. (L.P.), Alleged Debtor.

ALLEGED DEBTORS' RESPONSE TO PETITIONING CREDITORS' MOTION PURSUANT TO DEL. BANKR. L.R. 9006-l(e) FOR AN ORDER SHORTENING TIME FOR NOTICE OF THE HEARING TO CONSIDER THE EXPEDITED MOTION OF PETITIONING CREDITORS FOR THE APPOINTMENT OF A TRUSTEE PURSUANT TO 11 U.S.C. lOS(a), 1104(a)(l) AND 1104(a)(2) COME NOW the Alleged Debtors and file this response seeking denial of the Petitioning
Creditors' Motion Pursuant to Del. Bankr. L.R. 9006-I(e) for an Order Shortening Time for Notice of the Hearing to Consider the Expedited Motion of Petitioning Creditors for the Appointment of a Trustee Pursuant to II U.S. C. 105(a), 1104(a)( I) and II04(a)(2) (the "Motion

to Shorten Time"). In making this response, the Alleged Debtors do not waive their request that venue of this case be transferred to the United States Bankruptcy Court for the Northern District of Georgia, where their earlier Chapter 11 caseS are pending. PRELIMINARY STATEMENT In their motion for the appointment of a trustee, the Petitioning Creditors (two hedge funds that present themselves as three creditors by virtue of one hedge fund's having divided its ownership with an affiliate) assert that "[t]his Motion and these cases are not about a group of

RLFl 604674lv.2

disgruntled minority lenders in a credit facility." Expedited Motion of Petitioning Creditors for the Appointment of a Trustee pursuant to 11 U.S.C. 105(a), 1104(a)(J) and 1104(a)(2) [Docket no. 13] p. 6, filed May 17, 2012 ('Trustee Motion"). Do not believe it. The Trustee Motion, as well as the commencement of these involuntary cases, is nothing more than a tactical move by the hedge funds to gain leverage in ongoing negotiations. 1 Even if the Trustee Motion were on firm ground (which it is not), there is no question that a hearing during the gap period would be inappropriate. Section 303(g) provides for the

appointment of an interim trustee during the gap period only if an order for relief under Chapter 7 is sought and if necessary to prevent loss to the estate.
In the one case relied upon by

Petitioning Creditors for the appointment of a trustee during the gap period in an involuntary case seeking an order for relief under Chapter 11, the bankruptcy court found extraordinary circumstances where the debtor was not operating its business and was fraudulently diverting its assets during the gap period. To that end, the court concluded that serious and irreparable injury would result without the immediate appointment of an independent trustee. Nothing in the Motion to Shorten Time or the supporting affidavits comes close to alleging, must less proving, any exigent circumstance that would justify hearing the Trustee Motion during the gap period, much less taking the drastic step of shortening the Alleged Debtors' time to respond and prepare for a hearing on the appointment of a trustee. As for their allegation of gross mismanagement, the Petitioning Creditors rely on the Alleged Debtors ceasing, over a year ago, to provide services at unprofitable rates to certain customers. Indeed, the vast majority of the allegations relate to events that took place in 2007 (the appointment of the board and senior management), 2008 (operating losses and defaults under the senior secured
These hedge funds purchased their interests on the secondary market; however, they do not reveal when

they purchased their interest and at what discount, notwithstanding that Bankruptcy Rule 1003 specifically requires
this informalion from transferees.

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credit facility) and 2009 (amendments to the credit facility).

Notably, Black Diamond and

Spectrum fail to identify any purported wrongdoing in 2012 that would give rise to the appointment of a trustee.

As for their allegation that a trustee is needed immediately in the best interests of creditors, the Petitioning Creditors complain that Alleged Debtors have been unwilling to engage in negotiations with respect to restructuring. Even if this were true -- which it is not, this is hardly an issue to be addressed during the gap period. As set forth in the Declaration of Scott Macaulay filed herewith, the Alleged Debtors and their 20 or so subsidiaries (collectively "Allied") have been managing their business as well as it can be managed under the difficult circumstances in their industry over the last few years. -

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As to the Trustee Motion itself, the Alleged Debtors will respond in detail in due course, But they unequivocally state that (1) they have not mismanaged their business; and (2) they do not have conflicting fiduciary duties so as to make the appointment of a trustee in the best interest of creditors. The Court should accordingly deny the Motion to Shorten Time, and ultimately deny the request for an appointment of a trustee. FACTUAL OVERVIEW
I.

Allied Systems Holdings, Inc., which is an alleged debtor, is the ultimate parent

of about 20 other companies including Allied Systems, Ltd. Allied Systems Holdings, Inc. is a privately held Delaware corporation headqljartered in Atlanta, Georgia. Allied Systems

Holdings, Inc. has three direct subsidiaries: Allied Automotive Group, Inc., a Georgia corporation, Axis Group, Inc. also a Georgia corporation, and Haul Insurance Limited, which is a captive insurance company incorporated under the laws of the Cayman Islands. Allied System, Ltd., which is the other Alleged Debtor, is a Georgia limited partnership and is a subsidiary of Allied Automotive Group, Inc. 2. Allied's major line of business is carried out by Allied Automotive Group, Inc. This

and its direct and indirect subsidiaries (collectively, the "Allied Automotive Group"). 2

major line of business, known in the industry as "car-haul," is the transport of light vehicles, such as automobiles, sport-utility vehicles and light trucks, from manufacturing plants, ports, auctions, and railway distribution points to automobile dealerships in the United States and
The following Allied subsidiaries are part of the Automotive Group: Allied Automotive Group, Inc.; Allied Systems, Ltd. (L.P.); Allied Systems (Canada) Company; QAT, Inc.; RMX LLC; Transport Support LLC; F.J. Boutell Driveaway LLC; GACS Incorporated; Commercial Carriers, Inc.; and Allied Freight Broker LLC.
2

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Canada. The trips are generally what are known in the industry as "short hauls," with each averaging less than two hundred miles. Allied's major customers are automobile manufacturers. 3. Allied Automotive Group transports light vehicles by means of tractor trailers (the

"Rigs") specially designed for transporting light vehicles. As of the end of 2011, Allied owned about 2,400 Rigs, which operated out of about 44 terminals, most of which were leased and located in the United States and Canada. 4. Allied Automotive Group's drivers and most of its terminal employees are

unionized. These employees (the "Teamster Employees") are members of local unions affiliated with the International Brotherhood of Teamsters (the "Teamsters"), which negotiates on behalf of the local unions and their members. Allied employs about 1,835 people of whom about 1,062 are Teamster Employees. 5. Allied's much smaller line of business is carried out by Axis Group, Inc. and its

direct and indirect subsidiaries (collectively the "Axis Group"). 3 This line of business includes arranging for and managing vehicle distribution services, automobile inspections, auction and yard management services, vehicle tracking; vehicle accessorizing, and dealer preparation services for the automotive industry in the United States and Canada, and providing yard management services in Mexico. The Axis Group operates from 39 terminals located in the United States, Canada, and Mexico.
The Original Chapter 11 Case

6.

The Alleged Debtors and most of their direct and indirect subsidiaries

(collectively "Allied") were reorganized in Chapter 11 cases (collectively the "Original Chapter 11 Case") that were filed in the Northern District of Georgia on July 31, 2005 and that resulted in
3 The following Allied subsidiaries are part of the Axis Group: Axis Group, Inc.; CT Services, Inc.; Cardin Transport LLC; Terminal Services LLC; Axis Canada Company; Axis Areta, LLC; Logistic Technology, LLC; Logistic Systems, LLC.

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a plan of reorganization (the "Allied Plan of Reorganization"), which was confirmed by nowChief Bankruptcy Judge C. Ray Mullins and became effective in May 2007. 4 As a result of the reorganization, Allied's then unsecured creditors became the shareholders of Allied Systems Holding, Inc. Although the Original Chapter 11 Case is ready to be closed (indeed, a motion for a final decree was recently filed), at this point it remains an open and pending case in Atlanta before Judge Mullins. 7. In the Original Chapter 11 Case, Allied's goals were to ( 1) increase revenue by

increasing customer pricing, (2) deleverage by conversion of debt into equity, and (3) reduce labor costs through reductions in compensation and changes in work rules with respect to the Teamsters Employees and through shared sacrifice from non-union employees. 8. These goals were largely achieved, with significant aid from two private equity

funds, Yucaipa American Alliance Fund I, LP and Yucaipa Alliance (Parallel Fund I, L.P. (collectively "Yucaipa"). During the original Chapter 11 Case, Yucaipa, among other things, (1) acquired about two-thirds of a series of unsecured notes that Allied had issued in the principal amount of $150 million; (2) was the catalyst for obtaining an agreement with the Teamsters for concessions ("Labor Modifications") reducing wages of Allied's Teamster Employees by 15% for a three-year period; (3) financed the acquisition of Rigs for Allied's use; (4) supported a plan to convert general unsecured debt into equity; and (5) aided Allied in securing the exit financing (the "Exit Financing") essential to its reorganization.

Allied Systems Holdings, Inc. is the successor by merger with Allied Holdings, Inc., which was the ultimate Allied parent when the Original Chapter 11 Case was filed. When the Allied Plan of Reorganization became effective, Allied Systems Holdings, Inc. was created as a subsidiary of Allied Holdings, Inc., which was merged into Allied Systems Holdings, Inc., the surviving corporation. Thus, in connection with the Original Chapter 11 Case, the terms "Allied" and "Debtors" exclude Allied Systems Holdings, Inc. and include Allied Holdings, Inc. Also, in connection with the Original Chapter II Case, the term "Debtors" includes certain indirect Allied subsidiaries that no longer exist. Certain indirect Allied subsidiaries formed under the law of Mexico and Bermuda were not Debtors.

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9.

Yucaipa and the Teamsters joined Allied as proponents of the Allied Plan of

Reorganization. As of the effective date of the Allied Plan of Reorganization, Allied Holdings, Inc. created Allied Systems Holdings, Inc. as a subsidiary and merged into it. As provided in the Allied Plan of Reorganization, the outstanding stock of Allied Holdings, Inc. was canceled and Allied Systems Holdings, Inc. issued new common stock to Allied's general unsecured creditors, with Yucaipa becoming the owner of about 63% of the equity. Also as of the effective date, Allied's Exit Financing and the Labor Modifications became effective.
The Decline in Allied's Revenues

10.

In 2010, Allied had revenue of about $543 million.

In 2011, Allied had

substantially less revenue (about $343 million) because, in the first quarter of 2011, Allied ceased providing car-haul services to several customers who forced Allied to renew their contracts with unsustainable pricing during the recession in 2008 and 2009. This reduction occurred after Allied approached substantially all of its car-haul customers for rate increases, because the rate levels then in effect were not sustainable and did not cover operating costs. New long-term contracts and rate increases were achieved with Ford and several smaller customers in the United States and with Ford, Mazda, Hyundai, Kia, Honda, Nissan and Mitsubishi in Canada. General Motors, Chrysler, Toyota, and Honda in the United States

refused to accept the rate increases and, consequently, Allied discontinued providing car-haul services to these companies. 11. A major reason for the unsustainable rate levels that caused Allied to cease

providing car-haul services to several substantial customers was the drastic decline of production ("OEM Production") by original equipment manufacturers of light vehicles since the Allied Plan of Reorganization became effective in May 2007. This decline is a result of the recession which

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began in December 2007. The recession hit the domestic automobile market particularly hard, with General Motors Corporation and Chrysler LLC commencing bankruptcy cases in 2009 and shutting down most production until their assets could be sold. 12. As a result of the drastic decline in OEM production, there was an industry-wide

oversupply of capacity to transport light vehicles. The fierce competition among trucking companies (both union and non-union) and railroads for contracts to transport these vehicles led Allied's customers to substantially reduce the rate of compensation offered to Allied and its competitors. Thus, lower OEM production combined witb lower rates of compensation caused Allied to suffer losses in the years since its reorganization in 2007. 13. The aggregate industry OEM production of light vehicles in North America in

2007 was approximately 15 million units. OEM production declined drastically in 2008 and 2009 witb a slight improvement in 2010, when production was 11.9 million units. Reflecting
I

that decline in production, Allied transported 6.9 million vehicles in 2007 and had revenue of $823 million, while in 2010, Allied transported 4.5 million vehicles and had revenue of$ 543 million. 14. While the rate of compensation to Allied for transporting light vehicles has been For example, the rate of

declining, Allied's expenses in many areas have increased.

compensation of its Teamster Employees increased by more than 15% in June 2010 and increased again in June 2011. Also, as the Rigs age, they require more maintenance and capital improvements.

LEGAL STANDARDS
15. Bankruptcy Code 303, dealing with involuntary bankruptcy cases, contemplates

the appointment of a trustee in the gap period, but under circumstances very different from those

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presented in this case. As a threshold matter, it is well-established that the appointment of a Chapter 11 trustee is an extraordinary and disfavored remedy. Since there is a strong

presumption against appointing an outside trustee, the need for such an appointment must be proved by clear and convincing evidence. In re Marvel Entertainment Group, Inc., 140 F.3d 463, 471 (3rd Cir. 1998). To that end, there is a strong presumption that the debtor should be permitted to remain in possession absent a showing of need for such a remedy. 16. Section 303(g) provides for the interim appointment of a trustee (1) if the petition

seeks an order for relief under Chapter 7, and (2) if necessary to preserve the property of the estate or to prevent loss to the estate. Neither condition exists here. First, the petitions in these cases seek relief under Chapter 11, not Chapter 7. Second, the allegations of gross

mismanagement and malfeasance relate to Allied's ceasing to provide service under unprofitable contract (which occurred more than a year ago), and to amendments to Allied's senior debt documents that closed in 2008 and 2009. Moreover, the thrust of the Motion is not preservation of property of the estate, but the alleged unwillingness of the Debtors-under the control of Yucaipa-"to engage the Petitioning Creditors in restructuring negotiations." 17. It has been held that there is no statutory authority for the appointment of a

trustee in the gap period of an involuntary Chapter 11 case. In the Matter of Beaucrest Realty
Associates, 4 B.R. 164 (Bankr. E.D.N.Y. 1980). Similarly, in another involuntary Chapter II

case in which a motion for the appointment of a trustee was filed during the gap period, the bankruptcy court denied the motion on the evidence presented during the gap period and only granted it on a strong showing after the debtor consented to the order of relief and was proceeding as a debtor in possession. See In re St. Louis Globe-Democrat, Inc., 63 B.R. 131 (Bankr. E.d. Mo. 1985).

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18.

In the case of Professional Accountants Referral Services, upon which Petitioning

Creditors rely, a trustee was appointed during the gap period of an involuntary case seeking relief under Chapter 11. In re Professional Accountants Referral Servs., Inc., 142 B.R. 424 (Bankr. D. Colo. 1992). In that case, the bankruptcy court held that, under the circumstances presented a trustee could be appointed "on an interim and emergency basis." !d. at 425. Thus, the movants were required to demonstrate "serious and irreparable injury without the forthwith appointment of an independent, disinterested, competent trustee." Id. at 429. 19. In that case, the debtor was a telemarketing firm which was not currently

operating. Its financial statements "were fabricated from whole cloth and contained important misstatements and/or outright falsifications ."!d. at 426. The Debtor was continuing to divert its assets to the owners' other companies and the court found it probable that an order of relief would be entered. Testimony in that case revealed that management had directed subordinate employees to falsify submissions to a government agency and also revealed other fraudulent conduct by management which, if not immediately remedied, would cause severe and irreversible injury to the debtor's creditors.
ARGUMENT

The Petitioning Creditors Do Not Meet the Extraordinary Hurdle Required for Appointing a Trustee in the Gap Period

20.

The Motion to Shorten Time is decidedly lacking in allegations of the nature

found in Professional Accountants Referral Services for the simple reason that there is no evidence supporting any fraud or other serious wrongdoing on the part of the Alleged Debtors and their subsidiaries. Nevertheless, Petitioning Creditors assert that this Court should take the drastic step of appointing a Chapter 11 trustee to take charge of Alleged Debtors' business during the gap period of these involuntary bankruptcy cases, and that it should do so almost

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immediately, without g1vmg Alleged Debtors and other interested parties a reasonable opportunity to respond, If anything, the circumstances of this case justify enlarging, rather than shortening, the tight deadlines for responding to the Trustee Motion set forth in Del. Bankr, LR. 9001-l(c), which provides that notice of a motion such as the Trustee Motion ordinarily must be provided at least fourteen (14) days prior to the hearing date, with the deadline for objections to be no later than seven (7) days before the hearing date. In determining whether Petitioning Creditors, who presumably have been preparing their Involuntary Bankruptcy Petitions and related papers on their own timetable for weeks (if not months), have met their significant burden to demonstrate such dire and exigent circumstances as would justify bringing their Trustee Motion to a hearing on only a few days' notice, or whether (as Alleged Debtors submit) they are merely seeking a tactical advantage, this Court need look no further than the virtually nonexistent support Petitioning Creditors offer for their Motion to Shorten Time. Have

Petitioning Creditors given this Court any reasonable factual basis to conclude that this Court should rush to put Alleged Debtors under the control of a Trustee on a few days' notice? 21. The main support Petitioning Creditors proffer for their Motion to Shorten Time,

the first of the four items of support they offer on pages 3-4 of that Motion and the overriding focus of their Trustee Motion, is the assertion that Yucaipa's position as majority shareholder and controlling First Lien Lender of the Alleged Debtors creates unspecified "conflicts of interest" that allegedly prevent the Alleged Debtors from discharging their fiduciary duties, in ways that Petitioning Creditors never specifically identify in their Motion or, for that matter, in any of the papers filed in connection with their Involuntary Petition. When do Petitioning Creditors contend that this "conflict of interest" arose, creating a sudden emergency whereby this Court must rush, within the next few days, to appoint a Chapter II Trustee to run the Alleged

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Debtors' businesses? As set forth in the Trustee Motion and supporting papers, Petitioning Creditors base their contrived and erroneous "conflict of interest" argument on the fact that Yucaipa acquired a majority of Alleged Debtors' first lien debt from ComVest Investment Partners III ("ComVest") in August of2009, as permitted under a Fourth Amendment to Alleged Debtors' First Lien Credit Agreement. 22. Petitioning Creditors argue in these involuntary bankruptcy cases that the Fourth

Amendment to the First Lien Credit Agreement is invalid. This same argument is being made in an action that they filed on January 18,2012 against Yucaipa in the Supreme Court of the State of New York, Index No. 650150/2012 (the "New York Action"). 23. Moreover, the same argument was addressed in an even earlier action. That

earlier case involved a counterclaim for declaratory relief brought by CIT Group/Business Credit, Inc. ("CIT"), Administrative Agent for all the lenders under the First Lien Credit Agreement (including Petitioning Creditors) in an action filed by Yucaipa and Allied Systems Holdings, Inc. against CIT in the Superior Court of Fulton County, Georgia, Civil Action No. 2009-CV-177574 (the "CIT Action"). After extensive discovery and summary judgment

briefing, the parties mutually dismissed the CIT Action with prejudice on December 5, 2011. Petitioning Creditors were on notice of the CIT Action and gave a deposition in that case, but never objected or intervened in it. 24. In sum, the Petitioning Creditors' Involuntary Petitions and Trustee Motion are

nothing more than the latest in a series of tactical maneuvers to exert pressure on Yucaipa and other parties to purchase Petitioning Creditors' rights under their credit agreements with Alleged Debtors on the most favorable terms possible. Petitioning Creditors do not suggest (much less prove) that Alleged Debtors' Board or management are committing fraud or that there is any

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danger of Alleged Debtors' assets being suddenly wasted or depleted, but rather base their Trustee Motion and Motion to Shorten Time on three year old, discredited assertions of conflict of interest, which have been litigated to conclusion in one case and may soon be litigated to conclusion in another pending case, Stripped of its unsupp011ed conclusions, their Motion to Shmicn Time offers no concrete basis to deprive Alleged Debtors and other interested parties of a reasonable time to respond to Petitioning Creditors' overreaching and baseless Trustee Motion, Accordingly, their Motion to Shorten Time should be denied. Dated: May 21,2012 Wilmington, Delaware (No, 2981) Christopher M. Samis (No, 4909) RICHARDS, LA YI'ON & FINGER, PA One Rodney Square 920 North King Street Wilmington, Delaware 19801 Telephone: (302) 651-7700 Facsimile: (302) 651-7701 E-mail: collins@rlfcom E-mail: samis@rlf.com

-andJeffrey W. Kelley (GA Bar No. 412296) Ezra H, Cohen (GA Bar No. 173800)
TROUTMAN SANDERS LLP

Bank of America Plaza 600 Peachtree Street, Suite 5200 Atlanta, Georgia 30308-2216 Telephone No.: (404) 885-3000 Facsimile No.: (404) 885-3900 E-Mail: jeffl'ey .kelley@troutmansanders,eom E-Mai I: ezra.cohen@troutmru1smKiers.eom
Counsellor Alleged Debtors

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