Ehte Proposed Settlement

IN THE UNITED STATES BANKRUPTCY COURTFOR THE DISTRICT OF KANSAS

In Re: ) ETHANEX ENERGY, INC., ) Case No. 08-20645-7 RDB ) Debtor. )

TRUSTEE’S MOTION FOR APPROVAL OF (1) COMPROMISE AND SETTLEMENT,AND (2) TRUSTEE’S SEVENTH INTERIM APPLICATION FOR COMPENSATION

AND REIMBURSEMENT OF EXPENSES OF SPECIAL COUNSEL FOR THEPERIOD OF JANUARY 1, 2013, THROUGH MARCH 7, 2013

COMES NOW the Trustee, Eric C. Rajala, and moves the Court for approval of the

Trustee’s proposed compromise and settlement with McGuireWoods, LLP, and for approval of

compensation and reimbursement of litigation expenses incurred by the Trustee’s counsel, John

M. Edgar and the Edgar Law Firm, LLC.

In support of his motion, the Trustee states:

1. This motion is made pursuant to 11 U.S.C. §§ 328, 330 and 331, and Bankruptcy

Rules 2002, 2016 and 9019.

2. The Debtor filed for protection under Chapter 7 of Title 11 of the United States

Bankruptcy Code on March 27, 2008.

3. Eric C. Rajala is the duly appointed Chapter 7 Trustee in the above-captioned

bankruptcy case.

Motion for Approval of Compromise Pursuant to Bankruptcy Rule 9019

4. As part of his duties as trustee of the estate, the Trustee conducted an

investigation into the assets of the bankruptcy estate. Among the assets of the bankruptcy estate

disclosed to the Trustee by the Debtor were certain contingent and unliquidated claims identified

as “Contingent securities claims: v. McGuire Woods, L.L.P.” and “v. Receivership of Zahill

Estate”, with values listed as “unknown”.

Case 08-20645 Doc# 177 Filed 03/08/13 of 21

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF KANSAS

In Re: Ethanex Energy, Inc.; Case No. 08-20645-7 RDBTRUSTEE’S MOTION FOR APPROVAL OF (1) COMPROMISE AND SETTLEMENT AND (2) TRUSTEE’S SEVENTH INTERIM

APPLICATION FOR COMPENSATION AND REIMBURSEMENT OF EXPENSES OF SPECIAL COUNSEL

FOR THE PERIOD OF JANUARY 1, 2013, THROUGH MARCH 7, 2013

5. Further investigation revealed that these claims for damages arose from the

securities fraud, embezzlement, and other criminal acts and omissions of Louis W. Zehil, who at

the time was a licensed attorney representing and advising the Debtor in connection with the

Debtor’s attempts to raise equity capital to invest into the acquisition and construction of ethanol

production facilities in the Midwest. At the time he committed his criminal acts, Zehil was a

partner with the law firm of McGuire Woods, L.L.P.

6. On July 31, 2008, the Court entered an order approving the Trustee’s employment

of John M. Edgar and the Edgar law Firm, LLC (“Edgar”) as special counsel to assist the Trustee

in the prosecution of a claim on behalf of the estate against Louis W. Zehil and McGuire Woods,

LLP.

7. At the Trustee’s request, Edgar investigated the facts and circumstances of Zehil’s

actions, and on December 17, 2008, Edgar filed an civil action in the United States District Court

for the District of Kansas, styled Rajala, as Bankruptcy Trustee for Ethanex Energy, Inc., v.

McGuireWoods, LLP, Case No. 2:08-cv-2638 (the “Kansas Action”). The Kansas Action is

currently scheduled for a six week trial in the Kansas City, Kansas Division of the District of

Kansas, starting on May 9, 2013.

8. In the Kansas Action, the Trustee seeks unliquidated damages against

McGuireWoods, LLP, for (among other things) causing the failure of the Debtor’s business

operation, for the loss of the capital that had been invested in the Debtor, and for the loss of the

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value of the business that the Debtor would have developed but for the actions of Zehil and

McGuireWoods, LLP.

9. In its defense, McGuireWoods denies that it has any legal responsibility for the

criminal acts and omissions of Zehil; denies that it committed any acts or omissions that caused

any damage to Ethanex; and denies that Ethanex suffered damages to the extent claimed by the

Trustee in the Kansas Action.

10. On February 26, 2013, the Trustee and McGuireWoods, LLP, mediated their

claims and disputes before the mediator, John R. Phillips.

11. As a result of the mediation, the Trustee reached a settlement agreement with

McGuireWoods, LLP, for a gross settlement amount of Six Million Seven Hundred Thousand

Dollars ($6,700,000.00) to be paid to the Trustee by McGuireWoods, as set forth in the parties’

Settlement Agreement and Mutual General Release dated March 7, 2013 (the “Settlement

Agreement”). A true, correct and genuine copy of the Settlement Agreement is attached hereto as

Exhibit “A”, and is incorporated by reference as though fully set out herein.

12. The Settlement Agreement also provides for mutual releases by and between the

parties, for themselves and on behalf of anyone who asserts a claim through or on behalf of

them, as more fully described in Exhibit “A”.

13. In reaching the settlement with McGuireWoods, the Trustee weighed the value of

his claims, the strength of the defenses that have been asserted by McGuireWoods, and the costs,

risks, and delays inherent in taking the Kansas Action to trial to recover on his claims. The






Trustee has determined that the settlement represents a reasonable recovery to the estate, based

on the advice and counsel of his Special Counsel, who has a great deal of skill and experience in

prosecuting large commercial and professional negligence claims.

14. In evaluating the proposed settlement, the Trustee has also taken into

consideration the fact that all of the allowed creditors’ claims filed in the case have been paid in

full, or will be paid in full from existing funds, and that the proceeds of the settlement (net of

attorney fees, litigation expenses, and other administrative expenses of the estate) will be

payable to the shareholders of Ethanex.

15. Given the amount offered, the unliquidated nature of the Trustee’s claims, and the

other factors described above, the Trustee has determined that it would not be in the best

interests of the estate or the shareholders of Ethanex to take the Kansas Action to trial, and that

the estate and shareholders would receive the best value by settling on the terms set forth in the

Settlement Agreement.

16. Bankruptcy Rule 9019(a) provides that “[o]n motion by the trustee and after

notice and a hearing, the court may approve a compromise or settlement.” Fed. R. Bankr. P.

9019(a). In the Tenth Circuit, “[a] bankruptcy court’s approval of a compromise may be

disturbed only when it achieves an unjust result amounting to clear abuse of discretion.” Reiss v.

Hagmann, 881 F.2d 890, 891-92 (10th Cir. 1989). “The bankruptcy court’s decision to approve

the settlement, however, must be an informed one based upon objective evaluation of developed

facts.” Id. at 892.






17. In discussing how to evaluate the standard set forth in Reiss, courts have found

that the Bankruptcy Court’s general charge is “to determine whether the settlement is fair and

equitable and in the best interest of the estate.” Official Committee of Unsecured Creditors of

Western Pacific Airlines, Inc. v. Western Pacific Airlines Inc., 219 B.R. 575, 579 (D. Colo.

1998). In considering this general charge, the court should look at the following factors:

A. The probable success of the litigation on the merits;

B. Any potential difficulty in collection of a judgment;

C. The complexity and expense of the litigation; and

D. The interests of Creditors in deference to their reasonable views. Id.

See also Kopp v. All American Life Insurance Company, 213 B.R. 1020, 1022 (10th Cir. B.A.P.

1997).

18. To approve a settlement under Bankruptcy Rule 9019, the court need only

determine that the proposed settlement meets the lowest level of reasonableness. See In re

Pennsylvania Truck Lines Inc., 150 B.R. 595, 598 (E.D. Pa. 1992), aff’d, 8 F.3d 812 (3rd Cir.

1993). Accordingly, because the settlement agreement is reasonable in light of the facts and

circumstances, the Trustee requests that the agreement be approved by the Court pursuant to

Bankruptcy Rule 9019.

Motion for Approval of Interim Attorney Fees and Expenses of Special CounselPursuant to 11 U.S.C. §§ 328, 330 and 331, and Bankruptcy Rule 2016






19. John M. Edgar and the Edgar Law Firm, LLC, have earned compensation and

have incurred expenses in the course of providing legal services to the Trustee, as itemized on

the Settlement Statement attached hereto as Exhibit “B” and incorporated by reference as though

fully set out herein.

20. John M. Edgar and the Edgar Law Firm, LLC, have maintained daily expense

records setting forth the specific dates and expenses incurred, and a chronological summary of

such expenditures is itemized in Exhibit “B” and incorporated by reference as though fully set

out herein.

21. Neither John M. Edgar nor Edgar Law Firm, LLC, have entered into any

agreement, express or implied, with any other party in interest, including the Debtor, any

creditor, or any representative of them, or with any attorney or accountant for any such party in

interest for the purpose of fixing the fees or other compensation to be paid for services rendered

or incurred in connection with this case, and no agreement or understanding exists between John

M. Edgar or the Edgar Law Firm, LLC, and any other person for the sharing of compensation to

be received for services rendered in, or in connection with, this case.

22. Pursuant to the terms and conditions of the Trustee’s employment of Special

Counsel, as approved by the Court on July 31, 2008, John M. Edgar and the Edgar Law Firm,

LLC, are entitled to recover the sum of $23,376.73 for litigation expenses incurred from January

1, 2013, to March 7, 2013, plus a contingent attorney fee of 40% of the proceeds of the






McGuireWoods, LLP, settlement after deduction of litigation expenses, in the amount of

$2,436,680.58.

23. The following payments for expenses have been heretofore made to the Edgar

Law Firm, LLC, pursuant to the Order Authorizing Trustee’s First Interim Reimbursement of

Expenses of Special Counsel for the Period of September 1, 2008 to December 13, 2010 (Doc#

92): $20,000 paid on January 19, 2011, and $42,084.01 paid on February 3, 2011, for a total

payment of $64,084.01; pursuant to the Order Authorizing Trustee’s Second Interim

Reimbursement of Expenses of Special Counsel for the Period of December 14, 2010 to

September 22, 2011 (Doc# 103): $160,606.98 paid on October 25, 2011; pursuant to the Order

Authorizing Trustee’s Third Interim Reimbursement of Expenses of Special Counsel for the

Period of September 23, 2011 to November 30, 2011 (Doc# 113): $227,057.60 paid on January

3, 2012; pursuant to the Order Authorizing Trustee’s Fourth Interim Reimbursement of Expenses

of Special Counsel for the Period of December 1, 2011 to July 31, 2012 (Doc# 145): $35,425.10

paid on August 30, 2012; pursuant to the Order Authorizing Trustee’s Fifth Interim

Reimbursement of Expenses of Special Counsel for the Period of August 1, 2012 to October 31,

2012 (Doc# 160): $62,478.60 paid on December 17, 2012; and pursuant to the Order

Authorizing Trustee’s Sixth Interim Reimbursement of Expenses of Special Counsel for the

Period of November 1, 2012, December 31, 2012 (Doc# 164): $37,269.32 paid on January 29,

2013.






WHEREFORE, Eric C. Rajala, Chapter 7 Trustee, prays for an order approving the

proposed compromise and settlement described herein; for authorization to pay John M. Edgar

and the Edgar Law Firm, LLC, the sum of $2,436,680.58 for interim attorney fees and

$23,376.73 for litigation expenses; and for such other and further relief as the Court deems just

and equitable.

Respectfully submitted,

s/Eric C. Rajala Eric C. Rajala, Chapter 7 TrusteeKansas Supreme Court No. 10082Metcalf Bank Bldg, Ste 34111900 College BlvdOverland Park, KS 66210-3939Telephone (913) 339-9806Facsimile (913) [email protected]


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SETTLEMENT AGREEMENT AND MUTUAL GENERAL RELEASE

This Settlement Agreement and Mutual General Release (the “Agreement”) is made by

and between Eric J. Rajala, as Bankruptcy Trustee of Ethanex Energy, Inc. (“Plaintiff”) and

McGuireWoods LLP (“Defendant”). Plaintiff and Defendant are collectively referred to herein

as the “Parties.”

WHEREAS, on December 17, 2008, Plaintiff sued Defendant and others in the United

States District Court for the District of Kansas (the “District Court”) in an action styled Rajala,

as Bankruptcy Trustee for Ethanex Energy, Inc. v. McGuireWoods, LLP, Case No. 2:08-cv-2638

(the “Kansas Action”);

WHEREAS, on December 30, 2008, Plaintiff filed his First Amended Complaint,

asserting claims only against Defendant in the Kansas Action;

WHEREAS, on February 22, 2010, Plaintiff moved to file and filed his Second

Amended Complaint, and the District Court granted the motion on May 14, 2010;

WHEREAS, on August 24, 2010, Plaintiff filed his Third Amended Complaint;

WHEREAS, on February 26, 2013, the Parties mediated their claims and disputes before

John R. Phillips (the “Mediator”);

WHEREAS, a jury trial in the Kansas Action is set to begin on May 6, 2013 (the “Trial

Date”);

NOW, THEREFORE, in consideration of the agreements and payments described

below and other good and valuable consideration, the receipt and sufficiency of which is

acknowledged, the Parties hereby agree as follows:

1. Effective Date. This Agreement becomes effective as of the date on which all of

the Parties have signed this Agreement (the “Effective Date”).

Exhibit A Page 1 of 9

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2. Agreement Contingent on Bankruptcy Court Approval. This Agreement is

contingent only upon the United States Bankruptcy Court for the District of Kansas approving

the settlement provided for in this Agreement in In re Ethanex Energy, Inc., No. 08-20645,

pending in the United States Bankruptcy Court for the District of Kansas (the “Bankruptcy

Case”).

3. Motion for Approval of Settlement. Plaintiff agrees that within two business

days of the Effective Date, Plaintiff will file a motion for approval of the settlement provided for

in this Agreement in the Bankruptcy Case.

4. Motion for Continuance. Within three business days of the Effective Date, the

Parties agree to file a joint motion for continuance of the Trial Date.

5. Defendant’s Payment to Plaintiff. Within 10 business days of the date the

Bankruptcy Court approves the settlement provided for in this Agreement in the Bankruptcy

Case, Defendant or its designee(s) will pay Plaintiff or its designee(s) $6,700,000.00 (the

“Payment”) by wire transfer at the direction of the Plaintiff.

6. Dismissal of the Kansas Action. Within five business days of the receipt of the

Payment, Plaintiff will file in the District Court the Stipulation of Dismissal that is attached as

Exhibit A to dismiss with prejudice the Kansas Action.

7. General Release by Plaintiff Releasors. Except as specifically excepted below

with respect to Plaintiff’s restoration claim and effective upon Bankruptcy Court approval of the

settlement provided for in this Agreement in the Bankruptcy Case and conditioned upon and in

consideration of the Payment, Plaintiff, on behalf of Ethanex Energy, Inc. and all those claiming

through it or on its behalf including but not limited to its administrators, affiliates, agents,

assigns, associates, attorneys, counsel, creditors, directors, employees, executives, insurers,


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managers, members, officers, owners, parents, partners, personal representatives, predecessors,

principals, representatives, servants, shareholders, subsidiaries, and successors, past and present

(collectively, the “Plaintiff Releasors”), releases and forever discharges Louis W. Zehil, Strong

Branch Ventures IV, LP, Chestnut Capital Partners II, LLC, and Defendant and its respective

administrators, affiliates, agents, assigns, associates, attorneys, beneficiaries, counsel, directors,

employees, executors, heirs, insurers, managers, members, officers, owners, parents, partners,

personal representatives, predecessors, principals, representatives, servants, shareholders,

spouses, subsidiaries, successors, and trustees, past and present (collectively, the “Defendant

Releasees”), from any and all claims, including but not limited to all manner of accusations,

actions, allegations, claims, causes of action, complaints, contingent claims, controversies,

counterclaims, demands, grievances, judgments, liabilities, losses, suits, and third-party claims,

of any kind or nature, as well as all forms of relief, including all accountings, costs, damages,

debts, exemplary or punitive damages, expenses, liabilities, losses, remedies, and attorneys’ and

other professionals’ fees and related disbursements, whether direct or derivative, nominal or

beneficial, possessed or claimed, known or unknown, suspected or unsuspected, choate or

inchoate, and whether or not any of the Defendant Releasees are at fault, that the Plaintiff

Releasors had, now have, may have at any time in the future, or claim to have or have had, for or

by reason of any cause, matter, or thing whatsoever from the beginning of the world through and

including the Effective Date (“Released Claims by Plaintiff Releasors”), which are related to the

subject matter of the Kansas Action or related to any matter or claims whatsoever that either

party asserted or could have asserted in the Kansas Action. Provided, however, the restoration

claim made by the Plaintiff against assets forfeited by Louis W. Zehil in his criminal case, which

claim is presently pending before the United States Department of Justice, and the Defendant’s


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obligation to pay pursuant to paragraph 5 of this Agreement are specifically excluded from this

release.

8. General Release by Defendant Releasors. Effective upon Bankruptcy Court

approval of the settlement provided for in this Agreement in the Bankruptcy Case, Defendant

and all those claiming through it or on its behalf, including but not limited to its administrators,

affiliates, agents, assigns, associates, attorneys, counsel, creditors, directors, employees,

executives, insurers, managers, members, officers, owners, parents, partners, personal

representatives, predecessors, principals, representatives, servants, shareholders, subsidiaries,

and successors, past and present (collectively, the “Defendant Releasors”), release and forever

discharge the Plaintiff and Ethanex Energy, Inc. and its respective administrators, affiliates,

agents, assigns, associates, attorneys, beneficiaries, counsel, directors, employees, executors,

heirs, insurers, managers, members, officers, owners, parents, partners, personal representatives,

predecessors, principals, representatives, servants, shareholders, spouses, subsidiaries,

successors, and trustees, past and present (collectively, the “Plaintiff Releasees”), from any and

all claims, including but not limited to all manner of accusations, actions, allegations, claims,

causes of action, complaints, contingent claims, controversies, counterclaims, demands,

grievances, judgments, liabilities, losses, suits, and third-party claims, of any kind or nature, as

well as all forms of relief, including all accountings, costs, damages, debts, exemplary or

punitive damages, expenses, liabilities, losses, remedies, and attorneys’ and other professionals’

fees and related disbursements, whether direct or derivative, nominal or beneficial, possessed or

claimed, known or unknown, suspected or unsuspected, choate or inchoate, and whether or not

any of the Plaintiff Releasees are at fault, that the Defendant Releasors had, now have, may have

at any time in the future, or claim to have or have had, for or by reason of any cause, matter, or


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thing whatsoever from the beginning of the world through and including the Effective Date

(“Released Claims by Defendant Releasors”) which are related to the subject matter of the

Kansas Action or related to any matter or claims whatsoever that either party asserted or could

have asserted in the Kansas Action.

9. No Admissions of Liability. This Agreement represents a settlement of disputed

matters that were or could have been raised. This Agreement is entered into to avoid the

uncertainty, expense and inconvenience of litigation. Nothing in this Agreement is to be

construed as an admission of liability by McGuireWoods LLP, which expressly denies the

allegations in the Kansas Action and any wrongdoing, culpability or breach of legal duties

whatsoever.

10. Successors and Assigns. This Agreement is binding on and inures to the benefit

of the Parties’ respective successors and assigns. None of the Parties may assign this Agreement

or any rights or obligations thereunder.

11. Entire Agreement. This Agreement is the entire agreement between and among

the Parties concerning the matters set forth herein and supersedes all prior agreements,

understandings, discussions, negotiations, and undertakings, whether written or oral, between the

Parties concerning the matters set forth herein.

12. Amendment. This Agreement may not be amended, modified, or terminated

except by a written instrument that is designated as an amendment to this Agreement and that is

executed by all of the Parties.

13. Binding Arbitration. If the parties have any dispute concerning the enforcement

of this Agreement, or concerning the interpretation of any provision in this Agreement, then their

dispute will be submitted to binding arbitration before the Mediator.


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DRAFT – 2/27/2013

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EXHIBIT A


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DRAFT – 2/27/2013

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF KANSAS

____________________________________ ) RAJALA, as Bankruptcy Trustee for ) ETHANEX ENERGY, INC., ) ) Plaintiff ) Case No. 2:08-CV-2638 ) v. ) Judge Carlos Murguia ) MCGUIREWOODS LLP, ) Next Event: March 8, 2013 Final Pretrial ) Conference Defendant ) ____________________________________)

STIPULATION OF DISMISSAL

Having entered into a settlement agreement in the above-captioned matter, and pursuant

to the terms of that agreement, Plaintiff and Defendant hereby stipulate to the dismissal with

prejudice of Plaintiff’s complaint and this matter in its entirety.

Dated: , 2013 Respectfully submitted,

/s/ John M. Edgar John M. Edgar (KS #70270) David W. Edgar (KS #19121) Boyce N. Richardson (KS #78317) Brian T. Bear, PRO HAC VICE Matthew J. Limoli, PRO HAC VICE EDGAR LAW FIRM, LLC 1032 Pennsylvania Ave.

Kansas City, Missouri 64108 Telephone: (816) 531-0033 Facsimile: (816) 531-3322

Attorneys for Plaintiff

/s/ R. Lawrence Ward R. Lawrence Ward (KS #17343) James M. Humphrey (KS #70664) Miriam E. C. Bailey (KS #23183) POLSINELLI SHUGHART PC


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120 West 12th Street, Suite 1700 Kansas City, Missouri 64105 Telephone: (816) 421-3355 Facsimile: (816) 374-0509 Attorneys for Defendant McGuire Woods, LLP

IT IS SO ORDERED THIS ____ DAY OF ____________________, 2013. Judge Carlos Murguia Signed in chambers


Case 08-20645 Doc# 177 Filed 03/08/13 of 21

Exhibit B Page 1 of 4

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Case 08-20645 Doc# 177 Filed 03/08/13 of 21

Ehte Proposed Settlement

Documents

Transcript of Ehte Proposed Settlement