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                  UNITED STATES BANKRUPTCY COURT
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             FOR THE NORTHERN DISTRICT OF CALIFORNIA
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            BEFORE THE HONORABLE MARILYN MORGAN, JUDGE
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     In Re:                             ) Case No. 03-51775-MM
                                        ) Case No. 03-51776-MM
     SONICBLUE INCORPORATED;            ) Case No. 03-51777-MM
     DIAMOND MULTIMEDIA SYSTEMS, INC.;  ) Case No. 03-51778-MM
     REPLAYTV, INC.; SENSORY SCIENCE    ) Chapter 11
     CORPORATION,                       ) (Jointly Administered)
                                        )
                         Debtors.       ) Tuesday, May 5, 2009
                                        ) San Jose, California
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     Hearing on:
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     Supplement to fifth and final application for compensation and
     reimbursement of expenses (Docket No. 3384, 3616), by former
     special litigation counsel to SONICblue, Inc., et al.;
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     Hearing re objection to Docket No. 3384 filed November 4, 2008
     (Docket No. 3602), by Freefall Management LLC.
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     Appearances:
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     For the Committee:       Ron Oliner, Esq.
                              Duane Morris LLP   =20
                              One Market, Spear Tower, Suite 2000
                              San Francisco, California  94105-1104
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     For Applicant            Suzzanne Uhland, Esq.
     O'Melveny & Myers        Matt Powers, Esq.
     LLP:                     O'Melveny & Myers LLP
                              Two Embarcadero Center, 28th Floor
                              San Francisco, California  94111-3823
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     For Freefall             William McGrane, Esq.
     Management:              McGrane Greenfield LLP
                              One Ferry Building, Suite 220
                              San Francisco, California  94111
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                              Stephen D. Pahl, Esq.
                              Pahl & McCay
                              225 West Santa Clara, Suite 1500
                              San Jose, California  95113-1752
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     For Plan Administrator   Cecily Dumas, Esq.
     Dennis Connolly:         Friedman, Dumas & Springwater
                              150 Spear Street, Suite 1600
                              San Francisco, California  94104
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                    Appearances continued on next page.=0CAppearances =
continued:
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     From the U.S.            Nanette Dumas, Attorney
     Trustee:                 United States Trustee, Region 17
                              United States Department of Justice
                              280 South First Street, Room 268
                              San Jose, California  95113
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     Appearances via telephone:
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     For SB Claims:           K. John Shaffer, Esq.
                              Stutman Treister & Glatt, P.C.
                              1901 Avenue of the Stars, Twelfth Floor
                              Los Angeles, California  90067-6013
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     Digital Court            United States Bankruptcy Court
     Recorder:                Kristen Nitzel
                              280 South First Street, Room 3035
                              San Jose, California  95113
                              (408) 278-7567
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     Certified Electronic    =20
     Transcriber:             Palmer Reporting Services
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            Proceedings recorded by digital recording;
          transcript produced by federally-approved transcription
service.=0C                                                           3

 1        Tuesday, May 5, 2009                      11:32 o'clock a.m.

 2                    P R O C E E D I N G S

 3             THE CLERK:  On the 11:30 calendar:  SONICblue,

 4   Incorporated.

 5             MR. OLINER:  I think we're ready, Your Honor.  Good

 6   morning.  Ron Oliner, Duane Morris, counsel to the Committee,

 7   the PCC.

 8             THE COURT:  Good morning, Mr. Oliner.

 9             MR. OLINER:  Thank you.

10             MS. UHLAND:  Good morning, Your Honor.  Suzzanne

11   Uhland and Matt Powers of O'Melveny and Myers here on behalf of

12   Applicant O'Melveny and Myers.

13             THE COURT:  Okay.  Good morning.

14             MR. POWERS:  And just to make my brief appearance,

15   Matt Powers, Your Honor, for O'Melveny and Myers.

16             THE COURT:  Good morning, Mr. Powers.

17             MR. POWERS:  Good morning, ma'am.

18             MR. McGRANE:  Your Honor, William McGrane for Freefall

19   Management.

20             THE COURT:  I'm surprised to see you here this

21   morning.

22             MR. McGRANE:  Oh, we got a week's reprieve.

23             THE COURT:  Oh, okay.  Very well.

24             MS. CECILY DUMAS:  Good morning, Your Honor.  Cecily

25   Dumas appearing for Dennis Connolly, the Plan Administrator.

=0C                                                           4

 1             THE COURT:  Good morning.

 2             MR. PAHL:  Good morning, Your Honor.  Stephen Pahl,

 3   Pahl and McCay, on behalf of Freefall Management.

 4             THE COURT:  Okay.  Good morning, Mr. Pahl.

 5             MR. PAHL:  Thank you.

 6             MS. NANETTE DUMAS:  Good morning, Your Honor.  Nanette

 7   Dumas for the U.S. Trustee.

 8             THE COURT:  Good morning, Ms. Dumas. =20

 9             And I understand we have two telephonic appearances.

10             THE OPERATOR:  And Mr. Checov disconnected.  We're

11   trying to phone him back right now, Your Honor.

12             THE COURT:  Okay.  I would appreciate that, operator.=20

13   Thank you.

14             THE OPERATOR:  You're welcome.

15             MR. POWERS:  Excuse me, Your Honor.  Matt Powers. =20

16             Mr. Checov sent me an email - I'm sorry.  May I speak

17   here, or should I take it to the podium?

18             THE COURT:  Yes, that's fine.  Okay.

19             MR. POWERS:  He's actually taking his spouse to the

20   hospital for surgery.  It's minor.  But he may not be able to

21   dial in until later.

22             THE COURT:  Okay.  Operator, did you hear that?

23             THE OPERATOR:  He was on the line.  He just

24   disconnected.  We're trying to phone him back.

25             THE COURT:  Okay.  But if you cannot get through to

=0C                                                           5

 1   him, please don't worry about it.  It sounds like he may not be

 2   available.  And he has coverage here.

 3             THE OPERATOR:  Okay.  Thank you so much.

 4             THE COURT:  Thank you, operator.

 5             Do we have Mr. Shaffer on the line?

 6             MR. SHAFFER:  Yes, Your Honor.  John Shaffer of

 7   Stutman, Treister and Glatt specially appearing on behalf of SB

 8   Claims with respect to the motion to enforce the plan of

 9   reorganization.  We have a scheduling matter on that.

10             THE COURT:  Okay.  Good morning to all of you.

11             MR. OLINER:  Good morning.  Your Honor, if it's all

12   right, I'd like to address the Court with comments from here?

13             THE COURT:  That's fine.

14             MR. OLINER:  Fine.  And as to Mr. Shaffer's point on

15   scheduling, shall we take that up now or at the end of the

16   calendar?

17             THE COURT:  Well, if we take it up now, maybe he can

18   get off the telephone. =20

19             MR. OLINER:  John, -=20

20             THE COURT:  Mr. Shaffer, what is the issue on

21   scheduling?

22             MR. SHAFFER:  I would be - the issue, Your Honor, is

23   we currently have a hearing scheduled for this Friday, May 8th,

24   on the motion that was filed by Freefall and joined by SB Claims

25   to enforce the terms of the plan and confirmation order.

=0C                                                           6

 1             This has to do with a dispute over those distribution

 2   mechanisms between Freefall and SB Claims on the one hand and

 3   the Plan Administrator on the other hand.

 4             THE COURT:  I'm familiar with it.

 5             MR. SHAFFER:  I'm not able to attend on Friday.  And

 6   we were hoping to reschedule the hearing, if the Court believes

 7   the hearing is necessary, to another day.

 8             THE COURT:  Okay.  What day did you have in mind?

 9             MR. SHAFFER:  Well, we'd like to get it done as soon

10   as possible.  So if there is a date available within - within

11   the week after, that would be terrific.

12             THE COURT:  Okay.  Ms. McGowan, do we still have an

13   evidentiary hearing on Monday?

14             THE CLERK:  As far as I know, yes.  (Inaudible.)

15             THE COURT:  Okay.  Our calendar has opened up for

16   Thursday, May 14th.

17             MR. SHAFFER:  That is fine with me, Your Honor.  I

18   know that is the California Bankruptcy Forum, so I - I -=20

19             MR. OLINER:  I think that's just -

20             MR. SHAFFER:  - don't know if that interferes with

21   anyone else's schedule.

22             MS. DUMAS:  Your Honor, Cecily Dumas.  I will be

23   appearing at that hearing for the Plan Administrator.  And I

24   have another obligation the entire day on the 14th.

25             THE COURT:  Okay.  We also have the morning of the

=0C                                                           7

 1   13th, don't we, Ms. McGowan?

 2             THE CLERK:  We do.

 3             THE COURT:  The morning of the 13th?

 4             MR. SHAFFER:  That would be fine, Your Honor.

 5             THE COURT:  I also have a commitment at 10:00. =20

 6             How about the afternoon the 12th, Ms. McGowan?

 7             THE CLERK:  That's open.

 8             THE COURT:  Okay.  How about the afternoon of the

 9   12th?

10             MR. SHAFFER:  That works, as well.

11             THE COURT:  Okay.  Let's say two o'clock - I'm sorry.

12             Mr. McGrane, did you wish to be heard?

13             MR. McGRANE:  Oh, Your Honor, I just wanted to make a

14   note on - well, Freefall Manager - not Manager - but Freefall

15   Claims, which is different than the entity that's appearing

16   today, is the moving party.  And Mr. Shaffer's client, which

17   negotiated the plan, has just joined. =20

18             Mr. Shaffer is going to carry the argument.  I'm not

19   sure that I'll be able to be there.  And I'm not sure whether

20   Mr. Lewis, who's my cocounsel, will be here.  But as long as the

21   Court is comfortable with just having Mr. Shaffer do the

22   argument, I'm perfectly comfortable with that.

23             THE COURT:  Okay.  Let me just say it really is your

24   choice.  We have you scheduled now for May 8th.  I can also fit

25   you in for the afternoon of Tuesday, May 12th.  And it's your

=0C                                                           8

 1   choice.

 2             MR. McGRANE:  I - it's just I may not be able to be

 3   here and -

 4             THE COURT:  I understand that.

 5             MR. McGRANE:  - and no one from - from Freefall Claims

 6   may be here.  But we're happy to have Mr. Shaffer carry the ball

 7   for us.

 8             THE COURT:  Okay.  Then we'll set this matter for

 9   Tuesday, May 12th, at two o'clock.

10             MR. SHAFFER:  Two o'clock, Your Honor.

11             THE COURT:  Okay.  Thank you, very much.

12             MR. McGRANE:  Thank you.

13             MR. SHAFFER:  Thank you, Your Honor.

14             THE COURT:  Okay.  Let's turn to today's matter.

15             MR. OLINER:  Thank you, Your Honor. =20

16             I have probably five to eight minutes of comment, and

17   then I'll just turn it over to Mr. McGrane.  And I note that for

18   the first time in this case I'm actually sitting at the same

19   table with Mr. McGrane with a coincidence of interest in this

20   case. =20

21             In the larger context of the SonicBlue case, what this

22   case means, if anything, is that fiduciaries, Court-appointed

23   fiduciaries, have to turn square corners. =20

24             Pillsbury was absolutely riven with conflict, was

25   being pressured by a Committee member and really pulled a fast

=0C                                                           9

 1   one on this Court, and that's well known to the Court and it's

 2   well-supported in the record. =20

 3             But what happened in this case is, in addition to that

 4   defalcation, is the checks and balances, the redundancies, if

 5   you will, the failsafes also failed in this case. =20

 6             Levine could be charitably described to have looked

 7   the other way.  As the Court is aware, Pillsbury now has paid

 8   $10 million for their - its transgressions, and Levine 4.2 in

 9   combination of cash and claim waivers. =20

10             O'Melveny was also Court-imported counsel to the

11   estate, the trustee - rather the estate in this case.  And I

12   want to come back to their role in a minute. =20

13             When the so-called "fraud on the Court," in quotes,

14   was brought to your attention, you appointed a trustee.  The

15   trustee conducted an expansive and expensive investigation and

16   made a determination that he needed to bring claims against a

17   number of parties.  The trustee elected not to sue O'Melveny. =20

18             The Committee didn't participate in the investigation,

19   but the Committee does not second-guess the trustee. =20

20             In point of fact, the Committee has worked

21   cooperatively and constructively with the trustee for past year,

22   16 months, or so. =20

23             So we can get out in front of the trustee on that.=20

24   But when, pursuant to the plan, the time came to file final fee

25   applications, we decided to investigate.

=0C                                                           10

 1             A quick side note.  I meant to mention this.  Mr.

 2   McGrane has filed a declaration overnight.  And I have to tell

 3   the Court that what he says is accurate, insofar as earlier

 4   iterations of a draft plan contained some potentially

 5   exonerative, and I think, non sequiturs - because it didn't

 6   belong in the plan - language vis-a-vis O'Melveny. =20

 7             And it was Shaffer and it was McGrane who brought to

 8   the plan proponents' attention the fact that that just didn't

 9   belong in the plan.  It's out.  It was out.  But the point is

10   made that these folks who have been ruled to have substantially

11   contributed to the case are right there again watching as a

12   watchdog.

13             Your Honor described two hearings ago - and it wasn't

14   your words; these are mine - sort of a crucible that's going on

15   this case where between the trustee, perhaps the Committee to a

16   lesser extent, SB Claims, and other folks, it's been good for

17   creditors because of the crucible. =20

18             I think you used an analogy, perhaps, of an elephant

19   and none of us could feel the whole elephant.  But the point is

20   made that there's a place in the record, a place in time where

21   McGrane and Shaffer and Co. saw something in the plan that

22   didn't belong, and it was excised.

23             So a few hearings ago - maybe it was the last hearing

24   - I got in front of Your Honor and described the fruits of the

25   trustee - the Committee's investigation.  And I told Your Honor,

=0C                                                           11

 1   and I've since put it in pleadings, we investigated. =20

 2             We may not have as sensitive a nose as Mr. McGrane

 3   does, but rather than filing a very detailed objection to the

 4   O'Melveny fee request, we took a hard look at it and we said:

 5   You certainly shouldn't have any fees from the date forward, the

 6   date being the fraud on the Court, and maybe something more. =20

 7             And we told the Committee - rather we told O'Melveny

 8   that if you reduce your fees by a half a million bucks, which is

 9   more than what you're asking for, postfraud on the Court - if

10   you'll permit me - you know, that's probably about right. =20

11             And we were heading down that road.  The Committee

12   then filed two things.  They filed some kind of a self-serving -

13   and not inappropriate, I suppose - statement saying:  To get

14   this behind us, we will reduce our fees.  We understand the

15   Committee won't be objecting to our fees, provided we reduce by

16   a half a million dollars. =20

17             But they also filed the supplemental disclosures.  We

18   knew nothing about them.  Now are those supplemental disclosures

19   in and of themselves conflicting, such that O'Melveny had no

20   business in this case from the beginning and some drastic remedy

21   is due?  You know, I just don't know. =20

22             But I do know this, in a case where the hallmark is

23   fiduciary's failures to make timely, complete, accurate

24   disclosures to the Court, here is O'Melveny in the eleventh hour

25   squeezing in or squeaking in disclosures of 19 additional

=0C                                                           12

 1   connections to High Bridge (phonetic).

 2             I cannot tell you what this means in the larger

 3   context, but I can just conclude with these comments:  You know,

 4   it's just too rich for us now, for us to stand side-by-side as a

 5   committee with O'Melveny and say:  Everything's okay with the

 6   $500,000 reduction.

 7             And it's an absolute fact, in my views, and based on

 8   the authorities we've submitted in our most recent brief, that

 9   you're supposed to make prompt disclosures of connections,

10   irrespective of whether or not they are conflicts.  It's just

11   not your call. =20

12             My firm has made nine such disclosures.  The Austin

13   firm and perhaps - I don't - haven't kept close track of it -

14   the Friedman firms have made additional disclosures as the case

15   moves along.  That is what you're supposed to do. =20

16             The record - it's not an easy one - but the record is

17   entirely before you now.  I submitted, as I said I would at the

18   last hearing on request of Mr. McGrane and of the Court, the

19   draft objection we used when we contacted O'Melveny to say:  You

20   can't have it all.  It's in the record.

21             And I just believe that in the circumstances Your

22   Honor has what you need, albeit it got here in kind of a

23   circuitous and strange way, what you need to decide whether and

24   what O'Melveny is entitled to receive.  One final point -

25        (Dialing phone call noise.)

=0C                                                           13

 1             THE CLERK:  Operator, I think we're picking that up

 2   through the phone.

 3             THE OPERATOR:  All right.  Thank you, Your Honor.

 4             MR. OLINER:  It's just - one final point is, the

 5   record, as we've examined it after looking at documents were

 6   previous - that were previously submitted under seal, is

 7   admittedly circumstantial in the following respect: =20

 8             I've got a pile of emails where Bruce Bennett and

 9   Suzzanne Uhland, who are very smart, trained lawyers, are

10   sending emails, one to the other, without copying anybody at

11   Pillsbury, with lots of comment like:  We got to talk.  When can

12   we speak?

13             There aren't substantive emails.  I haven't examined

14   Mrs. Uhland - Ms. Uhland.  I cannot tell you - or Mr. Bennett.=20

15   I cannot tell you the contents of what they were talking about.=20

16   But they were more than just 327(e) counsel working some

17   specified limited piece of it.  They were the lawyers for the

18   deal and were instrumental in the negotiation of the deal, as

19   far as I can tell, and were very much involved in how it was

20   presented to this Court back in 2005.

21             Those are my comments.  I hope they're helpful.

22             THE COURT:  Thank you, Mr. Oliner.

23             MR. McGRANE:  Your Honor, I am always more comfortable

24   on my feet.  So with your permission, I'll...

25             THE COURT:  Please.

=0C                                                           14

 1             MR. McGRANE:  Your Honor, just as a preliminary matter

 2   - I have Mr. Pahl with me - I wrote to Mr. Checov and I, you

 3   know, adopted this convention, which is admittedly unusual.  But

 4   the record has been developing so fast I'm just filing these

 5   letters with the Court.  So you probably have three or four of

 6   them. =20

 7             And the last thing I - the next-to-the-last thing I

 8   wrote to Mr. Checov - or perhaps it was the last thing - was to

 9   say:  Look, I - given the circumstances here, I think the Judge

10   has enough.  And unless the Judge, herself, wants live

11   testimony, which is where I started off with this, I'm content

12   with the record. =20

13             And I - I, given my preference, I'd just like to treat

14   this as, in effect, final argument and allow Your Honor to

15   decide this based on the record and submit it.  So that's our

16   position.

17             Of course, if Your Honor would like to have the

18   witnesses put on, I am occupied with this trial.  We have been

19   assigned a judge, and I'll be in trial for six to eight weeks.=20

20   But Mr. Pahl is here.  He's very experienced trial lawyer.  I

21   have been accused of an excess of egotism in terms my own skills

22   as a cross-examiner, but I think Mr. Pahl is my equal. =20

23             And I'm perfectly happy to turn Ms. Uhland and Mr.

24   Bennett and Mr. Gershan, to a lesser extent, over to the tender

25   mercies of Mr. Pahl, if Your Honor would prefer that routine.

=0C                                                           15

 1             And having said that, this courtroom is festooned with

 2   Abraham Lincoln's picture.  But I would like, for purposes of

 3   this argument, to rely on John Adams, who was earlier in our

 4   history, who's most famous sobriquet was given at the time he

 5   defended the British troops who had been accused of killing

 6   Americans at the battle of - I think it was - now my history is

 7   failing.  I think it was Bunker Hill.  And he said:  Facts are

 8   stubborn things.  And this case is about that truth.  Facts are

 9   stubborn things.

10             Now the very last thing we got was filed last night by

11   the O'Melveny file clerk.  Even though I'm filing every minute,

12   they have the last word.  And good for them. =20

13             Unfortunately, they are not only paying - playing

14   catch-up ball, they're helping me make my point.  They put in

15   front of Your Honor John Todd's testimony. =20

16             We both agree that John Todd is, A, a perfectly honest

17   man, whose integrity and truthfulness in this case cannot be

18   questioned, and that he was in charge way back when the lawyer

19   from Pillsbury, Mr. Meridith, got his instructions on how to

20   draft the subordination language.  And they put his testimony in

21   front of you. =20

22             And here's what it says.  We were trying to create

23   flexibility to do something with Via, not there was a specific

24   loan that didn't fund and that meant the clause didn't mean what

25   it said. =20

=0C                                                           16

 1             And now, Your Honor, this document - do I have mine -

 2   I think this is the only way to even have a copy of this.  But

 3   for counsel's reference is PWSP 1001934.  I've had this in this

 4   Court a whole bunch of times.  And this - these are Mr.

 5   Meridith's notes. =20

 6             And it's where he crossed out the capital "I"

 7   indebtedness and turned it into generic indebtedness.  And we

 8   have said all along that that was the key to understanding how

 9   broad the subordination language was and how there was

10   absolutely no doubt that the Via indebtedness had seniority,

11   because this proved the point.  This - and this went to show the

12   fraud.

13             Now the facts are stubborn things.  We've had three

14   brilliant lawyers try to torture the facts here.  Mr. Bennett,

15   Mr. Kruger, to my - to whom I - my hat is off.  If anybody - if

16   I had to pick a fact where I wouldn't want to see him as the

17   torturer, it would have to be an awfully good fact. =20

18             And now Mr. Checov, whom I don't know, and who isn't

19   here, but from everything I understand, is a match for any of

20   them.  And certainly his firm is well deserving of its

21   reputation. =20

22             And what they're all trying to say is that, 'Gee, the

23   subordination language was not valuable.  It didn't mean what it

24   said.'  In the motion to dismiss where Mr. Shaffer - I don't

25   know if he's still on the line - was the person who authored the

=0C                                                           17

 1   reply brief we had, grammaticians' arguments about why capital

 2   "I" and the small "i" were the same thing that would make a - an

 3   English teacher at the highest levels of Harvard University get

 4   down on their knees.  But facts are stubborn things. =20

 5             The truth is that the subordination language was a big

 6   problem.  And Bruce Bennett is a terribly smart, diligent

 7   person.  This document was a Chilty Roth (phonetic):  He had to

 8   have it.  He's smart enough to read the indenture.  He's smart

 9   enough to smell a rat.  He's smart enough to get that document.=20

10   He knew he had the problem.  There is no doubt in any possible

11   way that he always knew.  Does that mean Suzzanne Uhland knew?=20

12   No. =20

13             What it means is that Mr. Bennett was determined to

14   solve this problem any way he could.  He knew how serious it

15   was.  And he enlisted her.  She may have been a dupe.  But he

16   enlisted her, and she cooperated.  Now what does that mean? =20

17             Gershan is there.  She - you know, later on we have

18   these documents where she is writing to Bennett.  Nobody is on

19   the phone.  Nobody is - it's just an email between the two of

20   them. =20

21             We went over this with Gershan, meaning they told him.=20

22   She never had any basis in her own experience, other than what

23   Bruce Bennett may have told her that was undoubtedly a lie,

24   because of what he had to know, given how smart he was and what

25   he had access to.  And she just went along. =20

=0C                                                           18

 1             Now where does that take us?  It takes us to probably

 2   the most indisputable fact in this case.  Ron says the

 3   quote/unquote fraud on the Court.  I don't think it needs quotes

 4   at all.  The fraud on the Court. =20

 5             When Ms. Uhland and her firm had their name - I

 6   believe it was above Pillsbury.  And they submitted that to you.=20

 7   And they didn't tell you what they were doing, and that was a

 8   terrible thing. =20

 9             And that's cost Pillsbury ten million bucks.  It's

10   cost Levine Neale, for not coming forward, four million, $5

11   million.  I don't know.  And they have not been touched. =20

12             And not only that, you know, - and I don't want to

13   shoot the machine-gun bullets here too fast and free - but, you

14   know, this very shocking thing happened during the plan

15   disclosure process, where - I'm not blaming Mr. Oliner for this,

16   in the sense that he was kind of late to the party, and it

17   wasn't his responsibility, although they used his name.  They

18   actually stuck - and I'm talking about the trustee now - in this

19   disclosure statement something that said that Ms. Uhland had

20   wanted more fulsome description to you of a seniority issue.

21             Nowhere - take me out and shoot me, if I'm wrong -

22   nowhere, not a single document, not a single piece of testimony,

23   nothing supports that statement. =20

24             And to show you the cynicism of it, they referred to a

25   document, Exhibit 555, that has nothing to do the subject. =20

=0C                                                           19

 1             Now in talking to Ron yesterday and asking him the

 2   question:  "Do you know anything, yourself, that would support

 3   that statement now that we are all so much more educated in

 4   looking backwards?" =20

 5             He said, "No." =20

 6             I said, "Then how?" =20

 7             And he said, "Well, as best I can remember, it was

 8   that they'd talked to her and that's what she said." =20

 9             Mr. Stein never asked her a question when he deposed

10   her about that.  And it goes to the heart of what's going on

11   with - I mean, I - you know, Judge, I - you know, I have been

12   saying all along, "Something is rotten in the state of Denmark."

13             But when I went back to get ready for this argument

14   and looked again at the actual language that they had tried to

15   insert in that plan - and the reason I've become so hyped-up on

16   this is because of the High Bridge. =20

17             You know, all - just kind of the more extreme nature

18   of looking at O'Melveny than even I, with my sensitive nose,

19   have looked at when the last disclosure came out.  And I'm just

20   thinking:  You know, there really is more here than meets the

21   eye. =20

22             So let me get past that and just talk about what it

23   all means.  It means, for purposes of the fee application, there

24   is no way to escape the conclusion that's just obvious from the

25   face of the application that they're just as guilty as Pillsbury

=0C                                                           20

 1   of doing one bad thing, at least. =20

 2             They made the application and they didn't tell you the

 3   truth.  And that's a terrible thing.  And that should impact on

 4   your willingness to give them money out of this case, which I

 5   think would reward conduct that strikes at the heart of the

 6   administration of justice and sends the wrong message, not just

 7   to them, but to the people at Pillsbury and the Levine Neale,

 8   who were told they had done something wrong and had to pay. =20

 9             And yet these people are being paid, affirmatively

10   paid, for what they did when they're just right there together

11   with Pillsbury and with Levine Neale not even sponsoring, just

12   being guilty of not reading and not performing a watch-dog

13   function.

14             A separate justification for not paying them, although

15   I think the first is to me the moral reason not to pay them, is

16   that they have a triple-star welding problem. =20

17             And what that means is Ms. Uhland has given evidence

18   that beginning in June of 2004 she began investigating the

19   indenture.  The indenture says, "High Bridge is connected to

20   Smithfield."  That's the address.  It's right there after the

21   sig line.  And - okay.

22             So they say it's a big - you know, the whole - it is a

23   big firm.  We can't keep track of this or that.  I didn't know

24   personally.  It's not the literal standard.  They have come

25   forward now, unlike Pillsbury, which never did.  And they've

=0C                                                           21

 1   given you a disclosure which gives you discretion to forgive

 2   them their sins and give them some money.  It gives you that

 3   discretion.  There is no question. =20

 4             But now we get to what seems to upset Ron, who is much

 5   harder to upset than I am.  Even Ron, you know, right down-the-

 6   middle Ron who, you know, has to be shown a lot before he gets

 7   excited, says:  Well, what about the fact that in November, they

 8   knew, and they admit they knew. =20

 9             And here it is April.  And that's when they first

10   tell, after they swindled - and I say this word as deliberately

11   as I have ever used a word in Court, Mr. Powers - they swindled

12   him into a deal without telling him about their conflicts.=20

13   That's what they tell him. =20

14             And he comes to you and he says:  Gee, I don't like

15   it, because this half-million-dollar deal that I've now reneged

16   on, I - it was under false pretenses. =20

17             Well, we're not dealing with people who don't think

18   things through, Your Honor.  You know, this is the absolute

19   height of the food chain in American law.  O'Melveny and Myers

20   has Warren Christopher as a partner, a former Secretary of

21   State.  These people are as bright and as fine a law firm as

22   exists in this country.  And I refuse to believe that anything

23   like this is done by accident.  I just don't believe it. =20

24             So they waited, thinking they could make a deal,

25   thinking they could avoid disclosing conflicts.  I'm beating

=0C                                                           22

 1   that tomtom.  And finally they come across.  And now they're

 2   surprised.  And they say:  Oh, well, we thought we had to do it,

 3   but we didn't think we had to do it.  And, oh, by the way, it

 4   doesn't apply to us, because we were just special - special

 5   counsel.  And, oh, by the way, we're not even counsel any more,

 6   and a million things. =20

 7             Now as far as I'm concerned they knew all along.  And

 8   as far as I'm concerned they were in on it from the beginning,

 9   because the name is right there.  And sometimes the simple

10   things are the most persuasive.  But, oh, what a tangled web we

11   weave when first we venture to deceive.  And in this case those

12   facts are stubborn things.

13             Now the last thing here is I can't tell you how or

14   what connection O'Melveny had to that exculpatory language that

15   John and I had to say:  "If you do that, we're going to the

16   Judge" to Mr. Stein. =20

17             I can't tell you how that language got there.  And I

18   guess this just fits into the observation category.  But at some

19   point, just taking their fees away from them is not enough, not

20   given the history of this case. =20

21             And I don't trust Mr. Stein to do the examination,

22   because he's responsible for that language in the disclosure

23   statement.  I don't want to say I don't trust Mr. Oliner

24   because, while we disagreed, I've never had anything but

25   complete confidence in his integrity. =20

=0C                                                           23

 1             And I don't want to do it myself, not because I don't

 2   trust myself, but because it's time for a new face.  Somebody

 3   ought to look at these people and look at them the same way that

 4   Pillsbury was looked at and the Levine Neale. =20

 5             And Mr. Oliner is stuck saying:  We don't second-guess

 6   the judgment of the trustee, and I don't go how he could say

 7   that with a straight face. =20

 8             When you see that language that they tried to stick in

 9   the disclosure statement, if you're not questioning Mr. Stein

10   and Mr. Connolly's judgment, you are not doing your job.  And

11   this plan says they're supposed to be supervising those people

12   and that they have the right to act independently.  And it's

13   time.

14             Thank you.

15             THE COURT:  Thank you, Mr. McGrane.

16             Ms. Dumas, anything further?

17             MS. CECILY DUMAS:  Yes, two points, Your Honor. =20

18             As Mr. Oliner recited, the trustee's team did an

19   exhausting - exhaustive investigation of the circumstances of

20   the so-called $15-million-priority claim and concluded, based on

21   a variety of legal, factual, and tactical determinations not to

22   pursue affirmative claims against O'Melveny.  That's a separate

23   issue. =20

24             With respect to O'Melveny's fee application, the Plan

25   Administrator has been in communication with the Committee and

=0C                                                           24

 1   fully supports the position taken by the Committee.

 2             THE COURT:  Ms. Dumas, do you wish to be heard at all?

 3             I'm sorry.  Ms. Nanette Dumas.

 4             MS. NANETTE DUMAS:  Your Honor, the U.S. trustee has

 5   not taken a position on this.  The Court has a full evidentiary

 6   record in front of it.  This is really a factual determination

 7   for the Court to make.  And that's the U.S. Trustee's position.

 8             THE COURT:  Thank you. =20

 9             Ms. Uhland?

10             MS. UHLAND:  Your Honor, I'd like to make a brief

11   presentation about our fee application.  That's actually why we

12   are here.  And then because some of the issues relating to the

13   objections, those issues where I might be a fact witness, I'll

14   turn it over to my colleague, Mr. Powers, to more specifically

15   address the objections. =20

16             I would like to note that, unfortunately, because we

17   drove directly here, neither of us has had the opportunity to

18   review the latest pleading file by Mr. McGrane and have no

19   knowledge of that pleading or, frankly, the draft disclosure

20   statement that he's discussing. =20

21             If appropriate we'd need to - the Court would like to

22   have people discuss that, or have our response to that, we'd

23   need to break and review that.

24             But, in essence, Your Honor, you know, this is a final

25   fee application.  We were special counsel to the case.  It's

=0C                                                           25

 1   been a little bit complicated for us since all of our matters

 2   have been subject to seal orders and under very strict

 3   confidentiality.  And, accordingly, our work in this case hasn't

 4   necessarily been evident in the public record. =20

 5             But I wanted to review briefly the basis on which

 6   we're seeking our claims and the current, although kind of

 7   complicated status of what are bottom-line fee request is that

 8   we are seeking approval of today.

 9             The - if the Court may recall, O'Melveny came into

10   this case because Pillsbury developed a - or had a conflict with

11   Intel.  And it became necessary to litigate with Intel with

12   respect to their relief from stay motion.  They had to bring an

13   alternative counsel. =20

14             O'Melveny was brought in, both because of our prior

15   experience in negotiating - well, working with SONICblue with

16   respect to its Intel cross-license matters, as well as the fact

17   that the O'Melveny lawyers had been representing Excite At Home

18   on the debtor side, as well as a number of other clients in

19   technology-intensive bankruptcies.  And our bankruptcy lawyers

20   were intimately familiar with the overlay and the intersection

21   of intellectual law, intellectual property law and bankruptcy

22   law.

23             So when we came in the primary conflict we addressed

24   was Intel's pending motion for relief from stay and argued that

25   they were trying to unjustifiably extrapolate from the Catapult

=0C                                                           26

 1   decision to permit them to terminate the license based on an

 2   ipso facto clause obtain relief from stay and terminate the

 3   license, based on their ipso facto clause that was contained in

 4   the license. =20

 5             They justified - or they argued that since we - the

 6   debtor could not assume the license that it was required to

 7   immediately reject or allow termination. =20

 8             And if the Court may recall the Pillsbury firm had

 9   initially recommended that the debtor, indeed, stipulate to such

10   a termination. =20

11             The Creditors' Committee at the time was very

12   resistant of that strategy because of their concern of the

13   trigger of the liquidated damages claims in the Via S3 Joint

14   Venture Agreement that would have resulted from that

15   termination. =20

16             So O'Melveny developed a two-part strategy to try to

17   deal with the tension of Intel process rights and the Catapult

18   case on one side and the, you know, potential flooding of the

19   unsecured claims in this case if the liquidated damages claim

20   were triggered.

21             We had two arguments.  One that the Court may be most

22   familiar with, if you will recall, was our consent argument.  As

23   it turns out soon after SONICblue filed, Via and Intel, who had

24   been in worldwide litigation with respect to patent issues,

25   suddenly reached a settlement, but the terms of which were

=0C                                                           27

 1   confidential. =20

 2             Second, and on this set the primary argument was

 3   perhaps there was consent to this - the transactions between Via

 4   and Intel that could help us escape Catapult. =20

 5             The second issue was we developed a rather novel

 6   theory, arguing that under the terms of the Intel license - I

 7   can't - because of the confidential nature, I won't go into

 8   detail on this argument - but we had a legal theory that the

 9   hypothetical test, which is the Catapult test, may have actually

10   aided us in this particular instance, given the terms of the

11   Intel license, to allow us to permit assumption in this

12   particular case. =20

13             Over the course of the next two years, while

14   constantly trying to settle the case, O'Melveny worked to

15   research and draft and plead, both through its motion to assume

16   and its oppositions to the motion for relief from stay, its

17   pursuit of these theories. =20

18             But, more importantly, and what led to this settlement

19   was in the summer of 2005, O'Melveny embarked on a very

20   intensive discovery campaign, if you will, as part of that

21   litigation, deposing Intel, Via, and S3 employees and obtaining,

22   in our mind, very valuable information that would have aided us

23   both in possibly obtaining leverage against Intel or prevailing

24   in that litigation; also possibly defending against the

25   liquidated damages claim from Via. =20

=0C                                                           28

 1             And at the conclusion or the near conclusion of that

 2   discovery at the end of the summer in 2005, Via approached

 3   actually SONICblue, through Pillsbury, seeking a global

 4   resolution of this matter.

 5             So we view the work, you know, sort of bringing the

 6   Court up to speed most of the work performed by O'Melveny in

 7   this case, all but the - sort of the 342,000 to about 1.5

 8   million, the amount we are seeking today, was the amount that we

 9   performed from the summer of 2003, initially contesting the

10   relief from stay motion, through this discovery briefing,

11   attempted settlement process, bringing us to the commencement of

12   the settlement discussion in the fall 2005. =20

13             In connection with that settlement there are really

14   two parts, two important parts of that settlement, from the

15   point of view of the estate and from the point of view of Via,

16   frankly.

17             Via got its compromised claims, but the more difficult

18   and perhaps more valuable aspect of that settlement with Via was

19   the three-way agreement between Intel, Via, and SONICblue with

20   respect to intellectual property rights, another matter that's

21   subject to the confidentiality protections of the agreement. =20

22             And it was that portion of the settlement agreement

23   that was the difficult aspect to negotiate that entailed a

24   shuttle diplomacy, crafting, and review of licensing executives

25   in these organizations commencing in the fall 2005 and not being

=0C                                                           29

 1   completed until the fall of 2006.  It took us a full year to

 2   negotiate through all of those provisions of the settlement

 3   agreement. =20

 4             For that work which coincided with the documentation

 5   of the settlement agreement, which is when the senior debt issue

 6   arose, O'Melveny is not seeking compensation from the Court.

 7             Effectively what we have agreed to do in our proposal

 8   with the Court is to cut off, if you will, from September 2005,

 9   our fee requests.  So we are not seeking the work - compensation

10   for the work doing this documentation of this complex

11   intellectual property portion of the settlement. =20

12             We're not seeking work - compensation for the

13   cooperation with the trustee examination.  And we did fully

14   cooperate with all of that. =20

15             We are, instead, seeking compensation for, I said,

16   that effectively - I'll get you the math in a second -

17   approximately $1.5 million, which is the full request, less the

18   amounts incurred from and after September 2005.

19             There was a - as the Court is aware - and it's a very

20   - lacking in grace, the way this particular fee request is -

21   proposal has come to the Court.  Maybe that's an understatement.

22             We had hoped to buy peace with the Creditors'

23   Committee and avoid further briefing, discussions, negotiations

24   with respect to the fee application process.  We initially made

25   this proposal, this 384,000. =20

=0C                                                           30

 1             They said that in order to - for the Creditors'

 2   Committee to refrain from objecting, they wanted to see more

 3   than that.  And that's when we struck upon the rounder number,

 4   if you will, the $500,000 compromise that's now been rejected by

 5   the Creditors' Committee. =20

 6             We are willing to and do stand by our original

 7   proposal to them, which is the September cutoff date, you know.=20

 8   And that is the amount that we are requesting.  As I said, when

 9   I - I'll sit back down.  I'll confirm the precise numbers for

10   the Court.  That is the status of our fee request.

11             With respect to the specific objections on the

12   disclosure issue, the other issues, I'd like to turn it over to

13   my colleague to review those.

14             THE COURT:  Thank you, Ms. Uhland.

15             MS. UHLAND:  You're welcome.

16             MR. POWERS:  Thank you, Your Honor.  Again, Matt

17   Powers.  I'm afraid I don't have a historical anecdote.  And I'm

18   not going to be as eloquent as Mr. McGrane.  That's for sure.

19             I'd like to touch upon a couple of things in the

20   themes that Mr. McGrane talked about. =20

21             And the first thing is I'd like to focus the Court on

22   the basis for Mr. McGrane's claim and the Freefall claim that

23   there was some discrepancy between the testimony of Suzzanne

24   Uhland in her deposition in this case, a two-day deposition, a

25   deposition that took place after months and months of written

=0C                                                           31

 1   discovery, that there's some discovery between her testimony

 2   about a June 2004 conversation that she had with David Gershan,

 3   former inhouse counsel at SONICblue, about whether or not the

 4   $15 million carveout for Via in the 2002 indenture was related

 5   to a $15-million loan that was going to be funded by Via but

 6   that never happened.  That's the conversation that Mr. McGrane

 7   claims never happens.  That's the conversation he claims David

 8   Gershan says never happened.  It's the basis for his assertion

 9   there was some long-standing conspiracy between Suzzanne Uhland

10   and Bruce Bennett.  It's not true.  And Id like to walk the

11   Court through why it's not true, because I think it's better for

12   us to focus on the facts here, rather than to talk about sort of

13   rhetorical flourishes.

14             I'd like to first read the Court exactly what Suzzanne

15   Uhland said, because what she testified to was not that she had

16   access to the document that Mr. McGrane has put up as a

17   demonstrative exhibit.  That's a document that no one at

18   O'Melveny had seen until discovery began in 2007 in this case,

19   long after the conflict between Pillsbury and the 2002

20   noteholders came to light. =20

21             This is not a document we ever saw.  This is not a

22   document that Suzzanne or anybody else at O'Melveny ever had

23   access to.  This is something that apparently was an internal

24   Pillsbury document.  It's apparently part of the drafting

25   process of the indenture.  We never saw it.  We had no access to

=0C                                                           32

 1   it, not in June 2004, not in September of 2005, not until long

 2   after this became an issue in 2007 when Pillsbury produced it.=20

 3   This is not a document we saw.

 4             Again to focus the Court on the discussion in June of

 5   2004.  Suzzanne's testimony - and I have a copy of it for the

 6   Court, if you'd like to - I don't know if you have your papers

 7   in front you.  Would you mind, Your Honor?

 8             THE COURT:  I don't need it.

 9             MR. POWERS:  Okay.  She's discussing a discussion she

10   had with David Gershan, again, June 2004.  She says, in her

11   deposition, "He told me that the - well, I asked him what this -

12   what the purpose and meaning of what looked like a defined term

13   - I don't have the documents in front of me - from Via that had

14   indebtedness in a certain principal amount, a $15 million

15   principal amount being senior debt."  She's referring to a

16   language in the 2002 indenture. =20

17             "And I asked him what the origin and meaning of that

18   basket, or whatever you want to call it, what the meaning of

19   that was.  He informed - and he informed me that the - there had

20   been a time when there were settlement discussions between Via

21   and SONICblue that might have included a loan from Via to

22   SONICblue.  And that that was what that had been put there for,

23   but the loan had never happened." =20

24             And I want to be clear about the facts here.  There is

25   no dispute.  In fact, when the 2002 indenture was being

=0C                                                           33

 1   negotiated SONICblue was simultaneously negotiating with Via to

 2   get a $15-million loan. =20

 3             We have as exhibits we've submitted to the Court,

 4   emails.  And that's attachment - Exhibit F to the declaration

 5   that was filed just a few days ago, Martin Checov's declaration.

 6             We have an email from David Gershan to Ron Matsushima

 7   (phonetic) and Ian Shay, cc to John Todd, attaching drafts of a

 8   settlement agreement with Via that would have included a

 9   $15-million loan.  The date of the email is March 22nd, 200- -

10             THE COURT:  I've read all of these multiple times.

11             MR. POWERS:  Oh, I'm sorry.  Of course, of course,

12   Your Honor.

13             THE COURT:  I'm very familiar with all of them.  I was

14   curious to know exactly what you're going to point out, but

15   these are all in your pleadings.

16             MR. POWERS:  Absolutely, Your Honor.  And in that

17   sense, I'll just gloss over sort of the high points. =20

18             The high points are there actually was a loan that

19   never happened.  There's no dispute about that.  John Todd

20   testified - he was the CEO at the time - that, in fact, one of

21   the reasons for that carveout in the indenture was that there

22   were - they were looking for potential liquidity from via in the

23   amount of $15 million. =20

24             David Gershan absolutely was involved in the

25   negotiations for the $15-million loan.  That never happened.=20

=0C                                                           34

 1   And it's - frankly, I'm not sure how anyone could draw the

 2   conclusion that it's impossible for David Gershan to have had a

 3   conversation where he said to Suzzanne Uhland in June 2004 that,

 4   in fact, this provision in the indenture was intended to refer

 5   to a loan that never happened from Via. =20

 6             David Gershan did not testify that that conversation

 7   never happened.  He testified, and this is in our papers, that

 8   he didn't remember the conversation, that he - he didn't dispute

 9   that it happened.  He simply didn't remember the meeting.  He

10   didn't dispute he'd never discussed this issue with Suzzanne

11   Uhland.  He just didn't remember the meeting.  That's hardly a

12   discrepancy in testimony, Your Honor.  It's just that Mr.

13   Gershan didn't remember the meeting. =20

14             All of the documents in the case, all of the evidence

15   in the case points to the fact that, in fact, there was this

16   loan that never happened.  That's the basis of what Mr. Gershan

17   told Suzzanne Uhland that's what happened in June 2004.  And

18   unless Your Honor has further questions, about that... all

19   right.

20             The next issue I'd like to talk about, Your Honor, is

21   the claim that - that - and I was surprised that Mr. McGrane

22   used the term "swindled," that there was some effort to

23   negotiate a deal with the 2000- - I'm sorry, Your Honor - with

24   the counsel for the Creditors' Committee, without revealing to

25   them that, in fact, we were planning on making a supplemental

=0C                                                           35

 1   disclosure, because that's not the case. =20

 2             As Mr. Checov put in his declaration, he discussed

 3   exactly that fact with Grant Stein in early April of this year,

 4   long before we'd reached any kind of agreement. =20

 5             I personally emailed a copy of the disclosure we had

 6   planned to make to Mr. Oliner on April 10th, four days before he

 7   made the filing.  There was no - that's not in the record, Your

 8   Honor.  That's an email that I searched in my computer this

 9   morning.  I'm happy to produce it. =20

10             I personally emailed the document Mr. Oliner on

11   Friday.  The document was eventually filed on Tuesday.  There

12   was - the point is not that Mr. Oliner is not telling the truth.=20

13   I believe him that he was surprised.  The point is that there

14   was no effort to hide the fact that we were making a

15   supplemental disclosure from either Mr. Oliner, Mr. Stein, or

16   the Court.

17             THE COURT:  Okay.

18             MR. POWERS:  Of course, we would have had to make one.

19             Finally, Your Honor, I'd like to briefly address the

20   2000 - I'm sorry - the 2014 disclosure statement.  Do we wish we

21   had filed that document in November?  Absolutely.  We weren't

22   doing anything for the estate at the time.  We had been doing

23   anything for the estate for years, or least a year. =20

24             Frankly, we planned on making the filing when we

25   noticed our fee application for hearing.  That turned out to

=0C                                                           36

 1   take some time.  And it was inadvertent on our part.  We should

 2   have filed it sooner.  We simply didn't. =20

 3             Do you have a question, Your Honor?

 4             THE COURT:  Not right now.

 5             MR. POWERS:  Finally, I'd like to - well, I'd like to

 6   talk to you about a couple things with the 2014 disclosure

 7   first.

 8             One, O'Melveny never had any knowledge until November

 9   2008 about any connection between any of the noteholders and any

10   of O'Melveny's clients.  It's just not true.  We didn't know

11   about it. =20

12             The test under 2014 is knowledge.  We had no idea.  I

13   don't know why - strike that, Your Honor. =20

14             Nor should we have known about it.  Running a search

15   for Smithfield in our conflicts database wouldn't have turned up

16   this connection.

17             THE COURT:  This is all in your pleading. =20

18             MR. POWERS:  It is, Your Honor.  It is.

19             THE COURT:  And I don't need you to repeat them.

20             MR. POWERS:  Okay.  I will not repeat them then, Your

21   Honor.

22             THE COURT:  Okay.

23             MR. POWERS:  The final thing I'll mention, Your Honor,

24   - I'm not sure if Mr. McGrane attempts to raise it.  And I'd

25   like to address the Court again, if he does.  Had a disclosure,

=0C                                                           37

 1   had we figured out that there was a connection in 2004 with the

 2   affiliate of Smithfield and had we made a disclosure at that

 3   time, it's not a conflicting disclosure.  It's - it's a

 4   completely unrelated matter, as we - as is in our papers, as you

 5   know. =20

 6             And under neither Federal law, under Section 327(e) or

 7   under California State Law does representing a corporate

 8   affiliate of another entity constitute an attorney-client

 9   relationship with that other entity.  It's not a conflicting

10   relationship.  And if Your Honor would like additional

11   discussion of that, I'm happy to - I'd be happy to discuss it

12   with Your Honor.  Thank you very much.

13             THE COURT:  I don't need it, Mr. Powers.  Thank you.

14             MR. POWERS:  Thank you.

15             THE COURT:  No, I don't need to hear any more right

16   now.  I'd like to shape this argument a little bit, if I can.=20

17   And I think it will assist you because, quite frankly, I think

18   that we've gone off on some things which are, in my mind, red

19   herrings.  And I would like to eliminate those red herrings and

20   bring us back to the issues that I really do care about. =20

21             And let me say that one of the reasons that I can

22   speak that way is that you all did a wonderful job in your

23   briefing.  It came in in pieces.  I tried to carefully read all

24   of the many pieces and give a lot of thought to the things that

25   you filed in advance of coming into the hearing today. =20

=0C                                                           38

 1             So I apologize to you if I seemed a little bit ready

 2   for you to move on, Mr. Powers.  But it seemed to me that maybe

 3   I can help shape this a little bit more.

 4             It does seem to me that there are two issues in

 5   dispute.  The first one deals with the timeliness of O'Melveny's

 6   supplemental Rule 2014 disclosure.  I don't really think that I

 7   need you to argue that any more.  And I don't think that I need

 8   you to brief that any more.  And I am prepared to rule on that

 9   issue today. =20

10             Bankruptcy Rule 2014(a) provides that an employment

11   application shall be accompanied by a verified statement setting

12   forth the professional's connections with the debtor, creditors,

13   and other party-in-interest, their respective attorneys and

14   accountants, the U.S. Trustee, or any person employed in the

15   office of the U.S. Trustee. =20

16             A professional has a duty to make a full, candid, and

17   complete disclosure.  And here I'm citing from the case that you

18   all reference, Park Helena Corporation.  But also I'm going to

19   refer to In re Mehdipour, which you can find at 202 BR 474, page

20   480, a Bankruptcy Appellate Panel case from 1996 that was

21   affirmed by the Ninth Circuit in 1998. =20

22             A disclosure, it must disclose all connections and not

23   just those that rise to the level of an actual conflict.  That's

24   the language from Mehdipour, but also another case that you're

25   familiar with, Granite Partners.

=0C                                                           39

 1             Although Bankruptcy Rule 2014(a) doesn't explicitly so

 2   state, there is an implied duty of continual disclosure.  Here

 3   I'm referencing a case from the Fifth Circuit from 2005, In re

 4   West Delta Oil Company, Inc., located at 432 F.3d 347, page 355.

 5             Professionals must also reveal connections that arise

 6   after their retention.  Absent the spontaneous timely and

 7   complete disclosure of all connections, pursuant to Rule 2014,

 8   counsel proceeds at its own risk.  And here I'd be referencing

 9   Rome vs. Braunstein, 19 Fed.3d 54 page 59, a First Circuit

10   decision from 1994. =20

11             The Court has considerable discretion to allow none, a

12   portion, or all the fees requested as a sanction for failure to

13   comply strictly with these disclosure requirements.  And that's

14   explained in a Ninth Circuit opinion from 1997, In re Lewis, 113

15   Fed.3d. 1040 pages 1045 through -46.

16             So at issue here is a five-month delay in filing the

17   supplemental disclosure and whether that renders it untimely,

18   justifying a sanction of disallowance of fees in whole or in

19   part. =20

20             Everyone is aware that the appropriate remedy really

21   turns on the facts presented and should be determined on a

22   case-by-case basis.  For example, in the case of A. W. Logging,

23   Inc., that you all reference to your briefs - I'm sorry.  You

24   didn't reference it. =20

25             This is a case from the Bankruptcy Court in Idaho in

=0C                                                           40

 1   2006.  It's A. W. Logging, Inc., 356 BR 506 pg 514.  In that

 2   case the Court imposed a sanction of only a ten-percent

 3   reduction in fees for filing a late disclosure statement to a

 4   late disclosure more than one year after counsel's appointment.

 5             Now here in all honesty it strikes me that the

 6   Committee's assertion of complete surprise or slack-jaw

 7   reactions really are misplaced. =20

 8             Indeed, the record shows that counsel for Freefall

 9   brought the circumstances of the disclosures to the attention of

10   the Committee and the Plan Administrator in November of 2008.=20

11   So the Committee was well aware of the circumstances, if not the

12   particulars. =20

13             It may be that O'Melveny was lulled into a sense of

14   complacency by the ongoing settlement discussions.  He's

15   indicated that certainly better practice would be to file a

16   disclosure promptly.  But even though that might be better

17   practice, O'Melveny has adequately explained its delay in filing

18   the supplemental disclosure. =20

19             The initial oversight of the connections is

20   understandable to me.  The inclusion of affiliates with a

21   different name is not typical of a conflict's check.  So I

22   understand how that happened. =20

23             It is important to me, it's significant, that

24   O'Melveny's engagement had concluded, that it was no longer

25   actively rendering services to the estate.  It was no longer

=0C                                                           41

 1   routinely filing pleadings, and its expectation that making the

 2   disclosure in connection with its final application for

 3   compensation was not per se unreasonable.

 4             The standard for appointment of special counsel is

 5   also less stringent than that for general counsel.  And here I'm

 6   going to cite to In re Computer Learning Centers, Inc., 272 BR

 7   897 page 905.  That's the Bankruptcy Court for the Eastern

 8   District of Virginia from 2001.

 9             Here none of the objecting parties have asserted that

10   there was an actual conflict of interest.  And it doesn't appear

11   that there was one.  Representation of an affiliate does not per

12   se constitute representation of an adverse interest.  You all

13   referenced the Huntco. (phonetic) case that stands for that

14   proposition were no adverse interest is found, denial of all

15   fees for failure to disclose is too Draconian. =20

16             Now here I'm citing from a Bankruptcy judge in the

17   Southern District of Ohio from 1995, In re National Liquidators,

18   Inc., 182 BR 186.

19             Where the equities outweigh the need for attorney

20   discipline for failure to disclose, the law does not impose a

21   per se bright-line rule that invariably requires the denial of

22   all fees and costs.  Once again, I'm citing to a Bankruptcy

23   judge from the Massachusetts from 1996 speaking in In re Bolton

24   Emerson, Inc., 200 BR 725 page 731.

25             So based on the record before me, a reduction in fees

=0C                                                           42

 1   based on the untimeliness of O'Melveny's supplemental disclosure

 2   is not warranted under the circumstances.

 3             Now I want to turn to the status conference portion of

 4   this hearing on the second disputed issue, whether there is

 5   evidence of misconduct or negligence on O'Melveny's that

 6   warrants a reduction or complete disallowance of the fees

 7   requested.

 8             I'm going to say that what bothers me when I look at

 9   the record, and I have gone much deeper than you all have in

10   looking at the deposition testimony that was earlier filed with

11   the Court.=20

12              It - your conduct doesn't make sense, Ms. Uhland.  I

13   can't make it hang together.  And it leaves me with more

14   questions than answers.  So the only way that I know how to

15   resolve that is to require an evidentiary hearing.

16             Let me try to explain to you the things that don't

17   make sense to me.  I'm going to accept that you never saw this

18   document, Ms. Uhland. =20

19             But when you knew that there was a conflict about

20   which interpretation to take, it doesn't appear to me that there

21   was really much investigation on your part.  What it - you know,

22   I can't tell from the record what you did to try to reference

23   out of the conflict. =20

24             It also bothers me about the preparation of the motion

25   to compromise.  It really bothers me that that motion did not

=0C                                                           43

 1   include any mention of the waiver, since it was clearly so

 2   important to the senior noteholders. =20

 3             It bothers me as to why the Via settlement was

 4   structured the way that it was with a waiver, rather than an

 5   allowed claim in a lower amount that was subject to the priority

 6   status that had been recognized up to that point. =20

 7             And when I look at the statements in the briefs that

 8   have been filed, and I compare it with what I can see the

 9   record, I just can't make it all hang together.

10             And about the other issues that you all would need to

11   flush out in an evidentiary hearing, but maybe this gives you

12   some sense of direction in terms of what I'm looking for. =20

13             A question in my mind is how much time you need.  I

14   don't know how much time you would need for an evidentiary

15   hearing, whether you need to do any further discovery.  I don't

16   know who the witnesses would be. =20

17             And, as I say, I don't know that there are any

18   disputed issues that I've overlooked.  And I certainly encourage

19   you to do that.  Frankly, what we're talking about here is

20   really the genesis of this problem.  We have to get to this in

21   order to understand what went wrong in this case.

22             Would you like a recess so that you can talk about

23   further discovery, how much time you need for an evidentiary

24   hearing, and how we're going to proceed?

25             MR. OLINER:  That's a terrific idea, but before we do

=0C                                                           44

 1   that can we have a sense from Your Honor - We discussed this - I

 2   don't remember the date - of your own availability in the coming

 3   months?

 4             THE COURT:  I'm going to be available.

 5             MR. OLINER:  You are?

 6             THE COURT:  I will.

 7             MR. McGRANE:  And, Your Honor, could I address the

 8   Court just for a moment?

 9             THE COURT:  Certainly.

10             MR. McGRANE:  You know, having started the brawl, I

11   had the thought - problem, which is, you know, we're - we just

12   sort of had John Q. Citizen status here. =20

13             Mr. Shaffer, who may or may not still be on the phone,

14   has advised me that there isn't even - since we're in a

15   postconfirmation basis - any legal basis for a substantial

16   contribution application. =20

17             And I guess I'm a little terrified at the commitment

18   of time and money and energy if we open up discovery and,

19   suddenly, since I have the most knowledge of this, I am in

20   effect the self-appointed prosecutor.  I'm not quite sure what

21   to do about it.  But I just want to - what I - what I think I'd

22   like is for the Committee to get litigation counsel, you know,

23   that I could shift the burden of this to.  I mean, I don't what

24   else to do because, you know, if it's just me, because I'm the

25   one with the real background -

=0C                                                           45

 1             THE COURT:  Really, the plan that's confirmed does

 2   allow Mr. Oliner's Committee to make these determinations as far

 3   as anything other than dealing with fee application.  And right

 4   now all we're talking about is the fee application, whether

 5   you're going to go any further.

 6             MR. McGRANE:  Well, it's the same, you know, as you

 7   put it.  And I just couldn't - I - you know, I didn't like the

 8   first part of what you said, because I don't necessarily agree

 9   with it.  But it's not the first time I've been wrong. =20

10             But the second part, where you said, "this is the

11   genesis," it's taken us a long time to get here.  But you're

12   absolutely right.  That is the moment of conception, that fee

13   app- - that settlement thing, and what went before it.  And it

14   is the key to understanding everything else that followed. =20

15             And it's so terribly important.  And I - you know, I'm

16   very grateful for the way the Court's handled this case.  And I

17   want to be helpful.  I just keep expressing this concern that

18   I'm a little terrified about having volunteered for this duty.=20

19   And I'm -

20             THE COURT:  I don't know that you have.  I don't know

21   that you have volunteered for it.  You're in trial on the

22   Jasmine case.  I don't know exactly where this is going

23             MR. McGRANE:  Okay.  Well, I'll talk to Mr. Oliner

24   about it.  Maybe we can figure something out.  Thank you.

25             MR. OLINER:  You know, Mr. McGrane has never been

=0C                                                           46

 1   terrified of anything, but - and substantial contribution is a

 2   Pandora's box I don't care open.  Using the larger context,

 3   having distributed some $73 million to creditors and looking to

 4   make a second distribution, this is not insignificant, to be

 5   sure, particularly given Your Honor's focusing us - refocusing

 6   us on the not-hanging-together piece. =20

 7             But it seems to me that what we're talking about is

 8   putting Ms. Uhland on the stand and possibly two other folks.  I

 9   have attended a hundred fee applications in my career, never an

10   evidentiary hearing in the context of a fee application, or vice

11   versa. =20

12             But it doesn't sound to me like it's a ton of work.=20

13   And I'd love to volunteer McGrane, who has a knowledge of the

14   underpinnings of this case that led to the appointment of a

15   trustee that's probably unmatched.  I would dare say it's

16   unmatched at this table.  No offense to Ms. Dumas. =20

17             And I would like to have him here for that event.  But

18   I don't think this is a - and I would like to ask questions as

19   well, under oath.  But I don't think this is a huge deal.

20             THE COURT:  Okay.  I'm going to let you all discuss it

21   between yourselves, -=20

22             MR. OLINER:  All right.

23             THE COURT:  - because at this point I certainly cannot

24   opine on that.

25             MR. OLINER:  Okay.  Thank you, Your Honor.

=0C                                                           47

 1             MR. McGRANE:  Thank you, Your Honor.

 2             THE COURT:  Thank you.  Let Ms. McGowan know when

 3   you're ready for me to come back with you.

 4             [COUNSEL]:  Thank you.

 5             THE CLERK:  All rise.

 6        (Recess taken from 12:38 p.m. to 12:57 p.m.)

 7             THE COURT:  Please be seated.

 8             I'm sorry.  Unless you wanted to speak at the podium,

 9   then move forward to the podium.

10             MR. McGRANE:  Well, thank you, Your Honor.

11             THE COURT:  Okay.

12             MR. McGRANE:  Mr. Powers and I have been speaking on -

13   I was going to state - and Mr. Oliner is privy to this, as well.=20

14   He likes to stay back there. =20

15             We're both agreeable, of course, to Your Honor's

16   desire for an evidentiary hearing, which - because it impacts on

17   subpoena power, I'm characterizing it as a trial of the fee

18   application, so that we can subpoena Mr. Bennett in -

19             THE COURT:  Okay.

20             MR. McGRANE:  - Los Angeles and get him up here. =20

21             Ms. Uhland is here in San Francisco. =20

22             Mr. Gershan is local. =20

23             Mr. Powers and I have discussed the fact that Ms. -

24   Ms. Uhland will very graciously make herself available without

25   subpoena. =20

=0C                                                           48

 1             We would both prefer something in very early October,

 2   even October 1st or October 2nd, if that's available to Your

 3   Honor.  I know you'll be in North Carolina.

 4             THE COURT:  I won't - that will not - I can't do it

 5   that particular time.

 6             MR. McGRANE:  What about the week following, Your

 7   Honor?

 8             THE COURT:  Fine, I guess.

 9             MR. McGRANE:  Well, that's great.  I mean, I - you

10   know, we both have vacation plans in August and early September.=20

11   So this is - this would work for counsel.

12             THE COURT:  Okay.

13             MR. McGRANE:  And the other important stipulation and

14   stipulations are that the PCC will - would supervises the

15   Chapter 11, the former Chapter 11 Trustee, now Plan

16   Administrator.  We'll instruct the Plan Administrator to make

17   available to Mr. Powers and his firm and any counsel they may

18   hire the complete discovery record, either electronically or in

19   hard copy at their expense without reservation of any kind, so

20   that they have whatever they need to get at in order to catch

21   up.

22             THE COURT:  Um-hum.

23             MR. McGRANE:  Secondly - now my Alzheimer's is showing

24   its ugly head again.  Oh - and I meant to say it was the Boston

25   Massacre -

=0C                                                           49

 1             THE COURT:  Too much for the brain.  That's all.

 2             MR. McGRANE:  It's the Boston Massacre and not the -

 3             THE COURT:  Okay.

 4             MR. McGRANE:  - Bunker Hill mystery.  Lewis pointed

 5   that out to me.  And I'm very grateful to him for the correct -

 6             THE COURT:  He's a good historian.

 7             MR. McGRANE:  There will be - other than making

 8   available the prior discovery record - absolutely no other

 9   discovery, no depositions, no interrogatories, no nothing, so

10   that we're not going to have that burden thrust on anybody.

11             THE COURT:  Fine.

12             MR. McGRANE:  And then the last thing, and this is

13   somewhat selfish, but I just wanted to put in for the record.=20

14   I've discussed with Mr. Oliner, and he's promised me that he

15   will ask the Committee to permit my firm, to the extent we

16   remain involved in the evidentiary hearing of this objection

17   that we made to, at some point, depending on the circumstances,

18   make a substantial contribution application to Your Honor and

19   not to have them raise, as an objection, that it is beyond the

20   jurisdiction of the Court to grant that substantial contribution

21   application because of some plan provision or other law that

22   would forbid it, as opposed to the conventional bases, which

23   we've had exhaustively explored in this case with respect to our

24   having the temerity to ask for money.

25             THE COURT:  Okay.

=0C                                                           50

 1             MR. McGRANE:  And he's supposed to get back to me on

 2   that.

 3             THE COURT:  Okay.

 4             MR. POWERS:  And I'm sorry, Your Honor.  The only

 5   other thing we should probably address is that we would like to

 6   set a status conference at some point, a couple of weeks or

 7   three weeks before, depending upon everyone's schedule, so we

 8   can hopefully work out a couple evidentiary issues before that

 9   day.

10             MR. OLINER:  Before we speak to the scheduling of a

11   status conference, let's rewind the tape, just so we can be very

12   clear on what Mr. McGrane includes as point number three,

13   substantial contribution. =20

14             I have a client.  It is - they are five members of a

15   Committee on two continents and three time zones.  I have been

16   requested by Mr. McGrane, and Mr. McGrane, like any smart

17   lawyer, knows how to get paid for services. =20

18             Mr. McGrane has asked that the Committee agree to

19   support his - or his firm's ability to make a request for

20   substantial contribution.  We're not talking about you've got

21   it, or it's agreed, or anybody's waiting objections to it.  It's

22   just an issue of whether or not prior language in an existing,

23   confirmed plan precludes it. =20

24             And I will make such a request to the Committee

25   tomorrow and give a prompt answer to Mr. McGrane.  And I'm very

=0C                                                           51

 1   mindful of the fact that he's carried a laboring oar to this

 2   point.  And if we're talking about an evidentiary hearing with

 3   three or perhaps more witnesses in October, I'd like to have Mr.

 4   McGrane at the party.  And he should be paid.  But it's subject

 5   to a request made to my Committee.

 6             MR. McGRANE:  And I guess I should add to that, Your

 7   Honor, so Mr. Oliner is clear, both a waiver as to whatever the

 8   plan may say and to the extent it is possible for the Committee

 9   and the Court to order a waiver of any other legal impediment,

10   as opposed to the Court's discretion to deny such a substantial

11   contribution.

12             THE COURT:  You know, I really don't want to get=20

13   into  -

14             MR. SPEAKER:  It's too much.

15             THE COURT:  - this now.  It is.  I think that Mr.

16   Oliner - we - you know, we don't try - we try not to catch

17   people by surprise.  And I'm not going to commit anything.  And

18   if Mr. Oliner can commit anything, he needs to speak with his

19   Committee and -

20             MR. McGRANE:  Right.

21             THE COURT:  - the issue will be before me.

22             MR. McGRANE:  Okay, Your Honor.

23             THE COURT:  Okay.

24             MR. McGRANE:  I would just - I'll be on vacation

25   through September 15th.  So if we can set a status conference at

=0C                                                           52

 1   least a couple of days after I get back, that would be the best.

 2             THE COURT:  Well, hopefully, our normal CMC is on - it

 3   looks like we have a law and motion on September 24th, Ms.

 4   McGowan.

 5             THE CLERK:  Yes.

 6             THE COURT:  And that's at two o'clock.  So I think

 7   that one o'clock - we'll have a CMC at one o'clock on September

 8   24th.

 9             And at that time we'll want to be very specific about

10   any in limine motions, who the witnesses are, how much time

11   you're going to need.  That's why I'm going to be making travel

12   arrangements.  It's probably too soon for you all to say whether

13   we're talking about more than one day?

14             MR. McGRANE:  I think we both thought it probably two

15   days and no more, but one or two days.

16             THE COURT:  So I'm going to keep a lot of flexibility

17   on my calendar.  But one possibility is that it might be October

18   13th and October 15th, if we need a second date.

19             It's possible also we could go the week before.  But

20   more likely than not I would be looking to that week of October

21   12th, which is the Columbus Day - Columbus Day is Monday the

22   12th.

23             MR. McGRANE:  And my birthday, Your Honor.

24             MR. POWERS:  And my birthday.

25             THE COURT:  Well, okay.  Very interesting.

=0C                                                           53

 1             MR. McGRANE:  I'm a Cancer, Your Honor, so I'm - I've

 2   already been 62. =20

 3             MR. POWERS:  The record so reflects.

 4             THE COURT:  Okay.  So we'll be more - I know that you

 5   probably want to have a firm date as soon as possible, but if I

 6   give it to you on - at our status conference in September; is

 7   that soon enough?

 8             MR. McGRANE:  That's fine with me, Judge.  I'll just

 9   keep October clear.

10             MR. POWERS:  Yes, Your Honor.

11             MR. McGRANE:  And at that point, by the way, we'll

12   have witnesses subpoenaed, so will actually know peoples'

13   availability.  And I think -

14             THE COURT:  Right.

15             MR. McGRANE:  - what you're suggesting will work best

16   for everybody.

17             THE COURT:  Okay.  Okay, anything further?

18             MR. OLINER:  I'm debating whether or not to spend

19   another minute or two with you to talk about what's happening

20   with the case in general.  Is it -

21             THE COURT:  Go ahead.  I'd like to hear.

22             MR. OLINER:  Okay.  Your docket is fast and furious,

23   and you have been signing orders.  We have, with the exception -

24   I'm led to understand that with the exception of the O'Melveny

25   claim, all claims' work is complete as of the last order you

=0C                                                           54

 1   signed.

 2             THE COURT:  My goodness.

 3        (Comments off the record.)

 4             MR. OLINER:  The - there is, of course, and Mr.

 5   McGrane reminds me, an issue of what we're referring to as the

 6   paid-in-full motion, which has now been moved to next week to

 7   accommodate Mr. Shaffer. =20

 8             Mr. Stein, and I, and Ms. Dumas are going to be

 9   jointly reviewing and signing and serving a notice of proposed

10   second interim distribution.  And we'll be able to use maybe a

11   course colloquialism.  We're going to blow out most of the rest

12   of the dough, we anticipate, in May or early June.

13             THE COURT:  And how much would that be?

14             MR. OLINER:  I'm not sure exactly how much that is

15   right now.  But undoubtedly there's going to be some moving -

16   movement on the reserves.  I've seen a draft. =20

17             In fact, Mr. McGrane has even seen a draft, where the

18   trustee and professionals want to hold back some money to get

19   back to the finish line.  I don't have an absolute answer for

20   you.  But the Pillsbury money has now been received.

21             THE COURT:  So will it be somewhere in the

22   neighborhood of $10 million?

23             MR. OLINER:  I think it's north of that, if I

24   understand it.  And then there's just this trial to get us to

25   the very end of the case and a final decree. =20

=0C                                                           55

 1             Now a final decree just got moved back, for obvious

 2   reasons, but - but other than that, I think this case is very

 3   close to getting closed.

 4             THE COURT:  Quite a remarkable piece of work.  And I

 5   appreciate the effort that all counsel has put into the case.

 6             MR. OLINER:  Thank you.

 7             THE COURT:  And I would hope that O'Melveny feels that

 8   it would be beneficial to have your day in court.=20

 9             MS. UHLAND:  Your Honor, we - we are looking forward

10   to responding to the Court's questions.  If there's any question

11   in your mind, we do want to address it.  And we're happy to do

12   so.

13             THE COURT:  Okay.  I think it would be for the best

14   for all to have all of this aired.

15             MR. McGRANE:  Thank you very much for your time, Your

16   Honor.

17             THE COURT:  Okay.  Thank you all.

18             MR. POWERS:  Thank you, Your Honor.

19             THE COURT:  Have a good day.

20        (Proceedings concluded at 1:07 o'clock p.m.)

21                            -o0o-

22  =20

23  =20

24  =20

25