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811-3 Small Smiles Dental Centers Settlement Declaration of Dan B. Lain in Support of Settlement
811-3 Small Smiles Dental Centers Settlement Declaration of Dan B. Lain in Support of Settlement
811-3 Small Smiles Dental Centers Settlement Declaration of Dan B. Lain in Support of Settlement
Chapter 11
(Jointly Administrated
under Case No. 12-01573)
The original Debtors whose cases were jointly administered under Case No. 12-01573 were CS DIP, LLC (f/k/a
Church Street Health Management, LLC) (Case No. 12-01573), SSHC DIP, LLC (f/k/a Small Smiles Holding
Company, LLC) (Case No. 12-01574), FNY DIP, LLC (f/k/a FORBA NY, LLC) (Case No. 12-01575), FS DIP,
INC. (f/k/a FORBA Services, Inc.) (Case No. 12-01577) and EE DIP, INC. (f/k/a EEHC, Inc.) (Case No. 12-01576).
The bankruptcy cases for FS DIP, Inc. and EE DIP, Inc. were converted to proceedings under Chapter 7 of the
Bankruptcy Code on May 16, 2013, and are no longer Debtors within this proceeding.
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I, Dan B. Lain, am over the age of eighteen and am the Liquidating Trustee for
the Liquidating Trust.2 I have personal knowledge of the facts set forth herein and would be
competent to testify hereto, and state that:
I.
1.
BACKGROUND
Based upon my review of the docket and other materials, I understand that on
February 20, 2012 and February 21, 2012 (the Petition Date), Church Street Health
Management, LLC n/k/a CS DIP, LLC (CSHM), Small Smiles Holding Company, LLC n/k/a
SSHC DIP, LLC (SSHC), FORBA NY, LLC n/k/a FNY DIP, LLC (Forba NY), FORBA
Services, Inc. n/k/a FS DIP, Inc., and EEHC, Inc. f/k/a EE DIP, Inc. filed voluntary petitions for
relief under chapter 11 of the Bankruptcy Code (as defined in the Motion). The Debtors
bankruptcy proceedings were jointly administered as Case No. 12-01573.
2.
Similarly, I understand that during the course of the Bankruptcy Case the Debtors
sold most of their assets to a purchaser who continued to operate some of the Debtors
businesses. After completion of the sale of substantially all of the Debtors assets, the Debtors
bankruptcy estates retained two primary assets of value to be used to fund a plan of
reorganization. The first was the Debtors insurance policies, including the coverage provided
under the SSHC Policies, and the second included causes of action such as avoidance actions
under Chapter 5 of the Bankruptcy Code.
3.
I understand that, on January 9, 2013, the Debtors and the Committee filed the
Second Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code for
CSHM, SSHC, and Forba NY. [Docket Entry No. 578, as modified by Docket Entry Nos. 620
Terms used herein but not otherwise defined herein shall have the meaning set forth in that certain Settlement
and Release Agreement attached Exhibit A (the "Agreement") to the Motion of the Liquidating Trustee for
Order (A) Approving Settlement With Insurers, (B) Granting an Injunction of the Insurers, and (C) Approving
Trust Distribution Procedures (the "Motion"), filed concurrently herewith.
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Order (the Confirmation Order) confirming the Plan. [Docket Entry No. 653].
5.
Pursuant to the terms of the Confirmation Order, the Effective Date of the Plan
On April 13, 2013, the Liquidating Trust was formed by the execution of that
certain Liquidating Trust Agreement and that certain Qualified Settlement Fund Trust
Agreement.
7.
8.
Additionally, the equity interests of the Debtors were transferred as provided for
in the Plan, and the Liquidating Trust became the sole member of each of the Reorganized
Debtors.
9.
At the time the Liquidating Trust was formed, the Debtors, a number of the
Dental Clinics, and some dentists previously employed at some of the Dental Clinics were
defendants in lawsuits related to services provided at the Dental Clinics. I understand that these
suits had been pending prior to the Petition Date and that approximately 11 lawsuits had been
filed on behalf of over one hundred plaintiffs (collectively, the Patient Litigation). In addition
to the formally initiated Patient Litigation, additional former patients had retained counsel to
pursue similar claims against the Debtors, Dental Clinics, and Clinic Dentists.
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II.
11.
INSURANCE POLICIES
The Debtors, and the Dental Clinics that the Debtors had operated, and many of
the dentists employed in the Dental Clinics were the beneficiaries of certain dental professional
liability insurance policies. Subject to a dispute as to coverage noted below, such policies
covered amounts that the Insureds may become legally obligated to pay as damages resulting
from dental incidents such as those that gave rise to the Patient Litigation.
12.
The SSHC Policies and the claims for coverage under such policies were the most
liability insurance coverage or similar professional liability coverage, to certain dentists who
were scheduled under such policies as an insured, additional insured or named insured and/or
who were at one time employed at the Dental Clinics. These insurance policies are further
described and defined in the Agreement as the Non-SSHC Policies. Although these Non-SSHC
Policies were not issued to the Debtors, the Plan granted the Liquidating Trust the ability to
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compromise claims for coverage under the Non-SSHC Policies related to the Patient Litigation
and other similar claims.
COVERAGE DISPUTES
I understand that after the initiation of the Patient Litigation, the Debtors tendered
Litigation under the SSHC Policies and the Non-SSHC Policies, respectively, subject to a
complete reservation of all rights thereunder.
17.
District Court for the Middle District of Tennessee, styled National Union Fire Insurance
Company of Pittsburgh, PA v. Small Smiles Holding Company, LLC, Civil Action No. 3:10-cv00743 (the Coverage Case).
18.
National Union sought to rescind and reform the SSHC Policies through the
Coverage Case.
19.
agreement of the parties, but was subject to renewal upon 30 days written notice of either party.
20.
The Liquidating Trust attempted to monetize the Insurance Rights under the
SSHC Policies and Non-SSHC Policies for the benefit of the Claimants. As part of that effort,
shortly after the formation of the Liquidating Trust, I renewed the Coverage Case to obtain
rulings as to some of the insurance issues in dispute as to the SSHC Policies.
21.
Although some considerable discovery had occurred in the Coverage Case before
it was administratively closed, both the Liquidating Trust and National Union have taken
extensive discovery in the Coverage Case since its renewal. It appears that most of the document
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production in the Coverage Case is complete, and the parties have begun to take depositions.
IV.
22.
PLAN STRUCTURE
Insurance Rights, a global settlement of all potential claims for insurance coverage from an
insurer is the best opportunity to maximize the potential value recoverable. This approach is
consistent with the Plan's structure.
23.
The Plan authorizes the Liquidating Trust, in connection with any resolution of
Insurance Rights, including as to the SSHC Policies and Non-SSHC Policies, to compromise,
settle and release any claims or potential claims by the Claimants, the Insureds, and the Clinic
Dentists against any insurer relating to the Small Smiles Claims, subject to approval by the Trust
Advisory Committee and approval by the Bankruptcy Court after notice and hearing. [Plan,
Sections 4.17(d) and (e), 4.18(c), and 4.19(c).]
24.
Under the Confirmation Order, the Court retained jurisdiction to approve these
anticipated settlements with respect to the Insurance Rights and all issues related thereto.
[Confirmation Order, Paragraph 37; Plan, Article XI, subparagraph (q)].
25.
Liquidating Trust must have an efficient and fair mechanism to distribute settlement proceeds to
potential Claimants. In this instance, such a mechanism is more efficient, quick, and fair than
continuing the litigate the underlying tort claims.
26.
The Plan authorizes the Liquidating Trust to propose such a procedure. [Plan,
Section 4.17(g).]
27.
distribute assets of the Debtor's estate the Claimants. [Plan, Article XI, subparagraph (r)].
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V.
28.
SETTLEMENT NEGOTIATIONS
Although I was not a party to negotiations related to the Insurance Rights that
occurred prior to the Effective Date of the Plan, I understand that prior to my involvement in this
matter certain Claimants representatives and National Union engaged in discussions to resolve
the potential Small Smiles Claims. I understand that there was a multi-day mediation conducted
during the Bankruptcy Case that involved National Union, the Debtors, the Official Unsecured
Creditors Committee, including certain Claimants representatives, and other interested parties. I
understand that none of those prior negotiations resulted in settlement agreements.
29.
agreed to participate in a mediation with National Union to attempt to resolve the Coverage Case
and related issues.
30.
extremely well regarded and experienced mediator with extensive experience, particularly with
insurance disputes in the context of mass tort litigation. The parties scheduled four days of
mediation with Mr. Geronemus in November and December of 2014. I asked representatives of
certain of the Claimants to participate in these mediation sessions.
31.
There was
considerable difference in the perspectives of National Union, on one side, and the Liquidating
Trust and certain Claimants representatives on the other. There were at times differences in
opinion between the Liquidating Trust and certain Claimants representatives, and at times
differences in opinion among certain Claimants representatives.
32.
The mediation sessions touched on a wide range of issues that all had to be
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33.
and the Insurers reached a conceptual agreement to settle in December 2014. That agreement
was represented by a term sheet.
34.
In the months since the term sheet was signed, the parties have been working to
finalize a definitive settlement agreement incorporating the term sheet concept, to prepare trust
distribution procedures that would facilitate the distribution of settlement proceeds, and to
outline the implementation process that would make all of these agreements possible.
Negotiations regarding the final documentation of the settlement concept has itself been at times
contentious and difficult.
35.
The final Agreement provides that the Insurers will pay the Liquidating Trust
Thirty Nine Million Dollars ($39,000,000.00). In exchange, the Liquidating Trust will release
the Insurers and Affinity of and from the Settled Claims, and sell the SSHC Policies and
coverage rights under the Non-SSHC Policies related to Small Smiles Claims to the Insurers.
VI.
36.
The Agreement yields a significant recovery for the Liquidating Trust and, thus,
for the Claimants. Despite National Unions arguments under the SSHC Policies, which could
potentially obviate coverage, National Union has agreed to pay $39,000,000.00 to the
Liquidating Trust. The Agreement benefits the Claimants by allowing the Liquidating Trust to
adopt a claims resolution procedure that allows for an equitable and efficient distribution of the
proceeds of the Settlement Amount to Claimants.
37.
While the I believe that the Liquidating Trust has very strong arguments in the
Coverage Case, and that much of the discovery taken to date strengthens the Liquidating Trust's
litigation position, I am cognizant of the inherent risks of litigation and I understand that the
parties' views of the strength of their respective positions differ materially.
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38.
I understand that if National Union were to succeed in the Coverage Case, that
result could have very significant consequences. Specifically, if National Union were to succeed
on its rescission claims, coverage under the SSHC Policies would be completely eliminated and
the Claimants would receive nothing from what I believe to be the Liquidating Trusts most
significant asset.
39.
Even if the Liquidating Trust were to fully prevail in the Coverage Case, the
amount recoverable under the SSHC Policies is dependent upon the successful establishment of
liability in the underlying tort actions against the Insureds. To date, the underlying claims tried
against the Insureds have not resulted in significant successes for the Claimants. Furthermore,
the Insurers have reserved all rights under the SSHC Policies, as to the Insureds, and the NonSSHC Policies, as to the Clinic Dentists, as to whether any of those policies afford coverage for
any such liability. Accordingly, even absent consideration of any validity issues, the amount of
potential recovery under the SSHC Policies is speculative.
40.
The Liquidating Trust anticipates that further litigation will result in significant,
additional expenses. Much of the depositions that might be taken in the case have yet to occur,
and essentially all expert witness work has yet to be commenced.
41.
Even if the Liquidating Trust were to prevail at the trial level, I anticipate that
National Union would pursue appeals, in which case the Liquidating Trust could incur
significant litigation expenses for years to come.
42.
The Agreement allows the Liquidating Trust and Claimants to avoid litigation
risks that could eliminate any meaningful opportunity of recovery for the Claimants.
43.
The Agreement allows the Liquidating Trust to accelerate the time at which
Claimants can receive some compensation or at least know what compensation will be available
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The Agreement allows the Liquidating Trust to curtail litigation expenses that
In the exercise of my business judgment, I find that the Agreement fairly balances
the competing desire to maximize recovery and the goal of avoiding risks of a lesser outcome
and further delays.
46.
Similarly, I have concluded that the proposed sale of the SSHC Policies and the
Small Smiles Claims under the Non-SSHC Policies is simply a mechanism that implements the
settlement that is beneficial and provides maximum recovery for the Liquidating Trust and the
Claimants. Accordingly, the Settlement Amount to be paid to the Liquidating Trust is fair.
47.
accomplish its purpose. The Plan authorizes the Liquidating Trust to compromise, settle and
release any claims or potential claims by the Claimants, the Insureds, and the Clinic Dentists
against any insurer relating to the Small Smiles Claims. The Plan Injunction ensures that the
Insurers will in fact get the full benefit of the release, which is a material part of the Agreement.
48.
Absent the imposition of the Plan Injunction, the Insurers would face the risk of
future claims under the Policies. Accordingly, the Insurers would likely require a reserve to be
established out of the settlement value to protect against and respond to such potential claims.
Thus, the Agreement provides for the requested injunction to avoid the risks to the Insurers that
would otherwise deplete the assets the Liquidating Trust could recover for the benefit of
Claimants.
49.
Finally, pursuant to the Plan, the Claimants, the Clinics, and the Clinic Dentists
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practical reality that absent such a group resolution, the value of any individual resolutions
would be substantially reduced, if possible at all.
50.
designed the Trust Distribution Procedures to allow for the efficient and fair evaluation of Small
Smiles Claims, and a prompt allocation of the Settlement Amount among Claimants.
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