Xechem Docket 229

8/14/2019 Xechem Docket 229

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UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

In re ) Chapter 11) Jointly AdministeredXECHEM, INC., )

) Case No 08-30513Debtor. )

) Hon. Jack B. Schmetterer

OBJECTIONOFDR.RAMESHPANDEY

TOTHE APPLICATIONTORETAINBASUCAPITAL

Dr. Ramesh Pandey, a party in interest in the captioned cases, hereby objects to the

Application of the Official Committee of Unsecured Creditors of Xechem, Inc., et al., to Retain

and Employ Basu Capital LLC as Capital Finder (the Application) as follows:

INTRODUCTION

Basu Capital should not be retained as a professional in these cases. Basu Capital does

not satisfy the statutory requirements of Section 327(a) because it is a creditor in these cases and

has not agreed to unconditionally waive its prepetition claim against the estates.

Even if Basu Capital waives its prepetition claim, it is questionable whether Basu Capital

can even meet the statutory requirements of Section 327(a) given its connections with certain

undisclosed creditors and bondholders, as well as Robert Swift, an insider charged with, among

other things, breaching his fiduciary duties to the Debtors. At the very minimum, Basu Capital

should be required to make further disclosures before it is retained as a professional in these

cases.

Finally, the information provided in the Application raises questions about whether Basu

Capital already has investors lined up and whether Basu Capital actually hopes to acquire a

Case 08-30512 Doc 229 Filed 10/29/09 Entered 10/29/09 18:08:01 Desc MainDocument Page 1 of 12


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substantial interest in the reorganized Xechem. Answers to these questions are material to

determining whether Basu Capital should be retained as a professional and compensated as a

professional. In other words, additional information is needed to determine whether the

Application merely represents a vehicle to transfer value to Basu Capital for past efforts (e.g., as

a means to indirectly pay its claim) or instead represents an effort to provide Basu Capital an

economic incentive to identify and obtain as yet unknown sources of capital.

THE FACTS

Shekhar Basu is the President of Basu Capital, a New York limited liability company.

On information and belief, Mr. Basu is also the owner of Basu Capital and fully controls Basu

Capital. Therefore there is no material distinction between Mr. Basu and Basu Capital for

purposes of the Application.

Mr. Basu filed a proof of claim against the Xechem International estate for $262,800, in

which he alleges:

Commencing in July of 2007, upon the instructions of RobertSwift, COO of the Debtor, Claimant accepted the assignment totravel to India to conduct an investigation concerning theoperations of Xechem (India) PVT, Ltd., to determine the currentstatus of the business, what was required and to potentially shutdown operations or make other recommendations. . . .With theauthority of the Board of Directors and management, I begansearching for and interviewing appropriate local Indian law firmsand ultimately recommended an Indian law firm that was highlyrecommended to me. This required also daily supervision,conference calls between the law firms in India and the Companys

Board of Directors. During the course of my investigation, Iuncovered the fact that the Companys alleged 67 percentownership of the alleged Indian subsidiary was not registeredaccording to Indian law creating a major problem. I alsouncovered the fact that funds and equipment may have beendiverted from their intended use.



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As part of this investigation, I was also in constant contact withattorneys in Chicago in coordinating their activities with the Indianlawyer. Upon facts uncovered by me, the Company had meengage attorneys on behalf of the Company. The suit was filed inSeptember 2007 and I attended, at the instructions of the

Companys COO, hearings at the Indian High Court in New Delhi.

In fact, Mr. Basu and Basu Capital were not retained by Xechem International to travel to

India on behalf of the company and the Board of Directors did not sanction Mr. Basus actions in

this regard. Mr. Basu traveled to India to further his own interests, and he was interfering in the

management of the company. This is why Mr. Basu and Basu Capital were not compensated in

connection with Mr. Basus activities in India.

To the extent Mr. Basu was taking directions from anyone at the company, it was Robert

Swift. Mr. Swift, however, has been charged by the Committee with self dealing in violation of

his duties to the Debtors. As a result of Mr. Swifts actions, the Committee sought and was

granted derivative standing to pursue legal action against Mr. Swift and those acting in concert

with him.

THE APPLICATON

In the Application, Basu Capital seeks to be retained on a contingency basis with Basu

Capital to be paid 10% of aggregate gross proceeds raised from new investors (New Investors)

introduced to the Debtor by Basu Capital and 5% of any investments by an existing stockholder

or creditor of the debtors or their affiliates (Current Investors). With regard to Current

Investors, it is proposed that Basu Capital receive the 5% commission even if it has absolutely

nothing to do with the Current Investors decision to invest in reorganized Xechem. In addition,

if Basu Capital raises in excess of $2 million, it will be entitled to five-year warrants to purchase

a substantial amount of shares in the reorganized Xechem based upon the pre-money valuation



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of the Debtors and the amount of capital raised from New and Current Investors. See

Application at 15. Although it is difficult to value the warrants, there is nothing in the

Application explaining why Basu Capital is entitled to compensation in addition to the already

generous 10% on capital raised from New Investors.

Although not discussed in the Application, the retention agreement also proposes that

Basu Capital will have a right of first refusal for the 24 months period following expiration of the

term of its retention to act as the finder in connection with any subsequent financings of Xechem

International with the right to introduce investors to the company providing up to 50% of the

funds raised in the subsequent financing on the same terms of compensation. Again, the

Application does not even attempt to explain how the benefits to be provided by Basu Capital

justify these terms. Instead, this proposed provision of the retention appears to be a method for

Basu Capital and the interests it represents to maintain control of the Debtors.

In addition, Mr. Basu and Basu Capital do not propose to unconditionally waive the Basu

Claim as part of the retention. Instead, they propose to waive the Basu Claim only on the

condition that Basu Capital raises a minimum of $2 million for the debtors andBasu Capital is

compensated in connection with the retention. Id. at 19. While it may not be likely, it is at

least possible that Basu Capital will be compensated in this case under the terms of its proposed

retention without waiving the Basu Claim.

Mr. Basu also discloses that several of Basu Capitals clients hold the debtors bonds

and are creditors in these cases, but he does not disclose any information about these clients,

including for example what percentage of Basu Capitals business these clients account for or

whether any of these clients have interests that are materially adverse to the debtors beyond their

creditor status. On information and belief, Basu Capital represents all of, or at least a large



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majority of, the Debtors bondholders, and Basu Capital may already have an agreement with

some of its creditor and bondholders clients to invest in the reorganized Xechem.

It is also notable that Basu Capital failed to disclose its relationship with Mr. Swift to the

Court, which relationship predates their involvement with the Debtors. Basu Capitals

prepetition fund raising efforts on behalf of the Debtors were in conjunction with Mr. Swift, and

Mr. Swift gained his position with the Debtors as a result of the control Basu Capitals clients

were able to exert over the Debtors as a result of their investment in the Debtors. See Form 8-K,

dated May 3, 2007 (Exhibit 1).

LEGAL DISCUSSION

I. BASU CAPITAL DOES NOT MEET THE REQUIREMENTS OF SECTION327(a).

Section 327(a) of the Bankruptcy Code provides, in part, that:

Except as otherwise provided in this section, the trustee, with thecourts approval, may employ one or more attorneys . . . or otherprofessional persons, that do not hold or represent an interest

adverse to the estate and that are disinterested persons, to representor assist the trustee in carrying out the trustees duties under thistitle.

11 U.S.C. 327(a). Thus, in order to be retained, a professional such as Basu Capital (1) must

not hold an interest adverse to the bankruptcy estate, (2) must not represent an interest adverse to

the estate, and (3) must be disinterested.

Satisfaction of these criteria is not just a guidepost to determining when employment may

be authorized, it is an inalterable prerequisite to employment. See, e.g., Tri-State Leasing Corp.

v. United States Tr. (In re Coal River Res., Inc.), 321 B.R. 184, 187 (W.D. Va. 2005) (noting that

Congress expressly limited bankruptcy courts discretion to authorize retention of counsel

through requirements of section 327 of Bankruptcy Code);Harold & Williams Dev. Co. v.



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United States Trustee (In re Harold & Williams Dev. Co.), 977 F.2d 906, 909 (4th Cir.

1992) (These are congressionally established per se rules that a bankruptcy court must apply in

exercising its approval power over the appointment of professionals.).

The Bankruptcy Code includes as a disinterested person, someone who is not a

creditor, an equity security holder, or any insider and someone who does not have an interest

materially adverse to the interest of the estate or of any class of creditors or equity security

holders, by reason of any direct or indirect relationship to, connection with, or interest in, the

debtor . . . or for any other reason. 11 U.S.C. 101(14). Basu Capital is not disinterested

because the Basu Claim has not been unconditionally waived and Basu Capital is a creditor in

these cases.

Basu Capital will undoubtedly argue that the Basu Claim belongs to Mr. Basu personally,

not Basu Capital, and therefore Basu Capital is not a creditor. Mr. Basu and Basu Capital,

however, cannot avoid the fact that they are disinterested in this case by employing a shell game

of this nature. The Debtors prepetition relationship was with Basu Capital and to the extent the

Debtors owe any money for work performed by Mr. Basu on a prepetition basis, it would be

solely in his capacity as the owner and President of Basu Capital. The Application recognizes as

much when it asserts that Basu Capital not Mr. Basu in his individual capacity traveled to

India on behalf of the debtors to investigate the debtors Indian operations, and rendered various

services to the debtors. See Application at 9.

Moreover, even though Mr. Basu and Basu Capital are willing to conditionally waive the

Basu Claim, it does not alter the fact that Basu Capital is presently a creditor in the case, that it is



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integrity of the bankruptcy process);In re BBQ Resources, Inc., 237 B.R. 641 (Bankr. E.D. Ky.

1999) (. . . bankruptcy courts cannot use equitable principles when the statutory language is

unambiguous);In re Ginco, Inc., 105 B.R. 620 (D. Colo. 1988) (Section 327(a) standard is a

strict one, broad enough to include anyone who in the slightest degree might have some interest

or relationship that would color the independent and impartial attitude required by the Code)

(citation omitted).

In addition, Basu Capital has substantial prepetition relationships with the Debtors, the

Debtors bondholders and creditors, and Mr. Swift. These relationships at the very least require

additional disclosures and investigations by the Creditors Committee before Basu Capital is

retained in these cases under Section 327(a).2

2For example, under Section 327(c), a person is not disqualified for employment under solely

because of such persons employment by or representation of a creditor, but that person may not,while employed by the estate, represent a creditor in connection with the case. Certainly, if BasuCapitals existing clients will be investing in the reorganized debtor, Basu Capital will berepresenting those clients in connection with the case in violation of Section 327(c).

For example, if Mr. Basu had any involvement

with Mr. Swifts wrongdoing, it certainly cannot serve as a professional in these cases.

In addition, Basu Capitals relationship with bondholders and creditors and the proposed

compensation structure, which provides Basu Capital with five-year warrants and the potential to

become a substantial stockholder in the reorganized Xechem, raises a serious question regarding

exactly what Basu Capital is doing for the Debtors estates and whether it deserves to be

compensated in the amounts proposed or at all. If Basu Capital and its clients are already willing

to invest in reorganized Xechem, there does not appear to be any reason for the estates to

compensate Basu Capital under a formal retention arrangement. The purpose of retaining and

compensating a capital finder is to identify new sources of capital, not to facilitate Basu

Capitals investment in the reorganized Xechem.



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II. THE PROPOSED COMPENSATION IS NOT REASONABLE.Even if the Court finds that Basu Capital meets the requirements of Section 327(a), the

proposed compensation is not reasonable. First, Basu Capital should not be compensated in

connection with any investment made by parties that it does not specifically bring to the table,

including Current Investors.

Second, at the very least, there needs to be some explanation of why the warrants and

right of first refusal two unusual forms of compensation for a capital finder are justified in

this case. Without some meaningful explanation, there is no reason for the Court to approve

compensation in excess of the 10% commission provided in connection with investments by

New Investors.

III. BASU CAPITAL SHOULD NOT BE RETAINED IF THE COMPETING PLANPROPOSED BY MR. FORTHUN CAN BE CONFIRMED.

Finally, given that Mr. Forthun has obtained a $2 million commitment to fund his

proposed plan of reorganization (seeExhibit 2) and there is no cost to the estates for this

investment, the viability of Mr. Forthuns plan should be tested before the Creditors Committee

proceeds with its proposed plan and the retention of Basu Capital.

CONCLUSION

WHEREFORE, for the reasons stated herein, Dr. Pandey respectfully requests that the

Court deny the Application and grant Dr. Pandey such further relief as the Court deems

appropriate under the circumstances.

Dated: October 29, 2009 Respectfully Submitted,

DR. RAMESH PANDEY

By: /s/ Sara E. LorberOne of His Attorneys



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William J. Factor (6205675)Sara E. Lorber (6229740)THE LAW OFFICE OF

WILLIAM J. FACTOR, LTD.1363 Shermer Road, Suite 224

Northbrook, IL 60062Telephone: (847) 239-7248Facsimile: (847) 574-8233Email: [email protected]: [email protected]



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CERTIFICATE OF SERVICE

I, Sara E. Lorber, an attorney, hereby certify that, on October 29, 2009, pursuant to

Section II, B, 4 of the Administrative Procedures for the Case Management/Electronic Case

Filing System and Fed.R.Civ.P. 5(a), I caused a copy of the foregoing document to be served

electronically through the Courts Electronic Notice for Registrants on all persons identified as

Registrants on the appended Service List.

/s/ Sara E. Lorber



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SERVICE LIST

Registrants in the Case

(Service through ECF)

Kara J. Bruce [email protected], [email protected]

Sonia U. Chae [email protected]

Douglas S. Draper [email protected], [email protected],[email protected]

Deborah W. Fallis [email protected], [email protected]

B. Lane Hasler [email protected]

Steve Jakubowski [email protected]

Edward J. Lesniak [email protected]

Monika J. Machen [email protected]

William T. Neary [email protected]

Robert E. Richards [email protected]

Elizabeth E. Richert [email protected], [email protected]

Christopher R. Thompson [email protected]

Elliot Wiczer [email protected]


Xechem Docket 229

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Transcript of Xechem Docket 229