Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_07-cv-03483/USCOURTS-cand-5_07-cv-03483-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

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United States District Court

For the Northern District of California

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ORDER DENYING YORK CREDIT OPPORTUNITIES FUND'S MOTION FOR LEAVE TO APPEAL —No. C-07-03483 RMW

TSF

United States District Court

For the Northern District of California

E-FILED on 11/9/07

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

In re: SONICBLUE INC., et al.

No. C-07-03483 RMW

ORDER DENYING YORK CREDIT

OPPORTUNITIES FUND'S MOTION FOR

LEAVE TO APPEAL

Appellant York Credit Opportunities Fund, L.P. ("York") moves for leave to appeal the

bankruptcy court's order approving the trustee's selection of his law firm as counsel over York's

objections. Dennis J. Connolly, the Chapter 11 Trustee, ("Trustee") and the United States Trustee

oppose York's motion. The court has read the moving and responding papers and considered

arguments of counsel presented at a hearing on November 2, 2007. For the reasons set forth below,

the court denies York leave to appeal.

I. BACKGROUND

This appeal arises out of purportedly the largest bankruptcy pending in the Northern District

of California. On March 21, 2003, SONICblue, Inc. and its three subsidiaries, Diamond Multimedia

Systems, Inc., ReplayTV, Inc., and Sensory Science Corp., (collectively, "SONICblue") filed

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1

 Because the court later relied on the record for its finding that Alston & Bird was qualified and in

the best interest of the estate, it is necessary to explain the contents of the Trustee's motions and

declarations.

ORDER DENYING YORK CREDIT OPPORTUNITIES FUND'S MOTION FOR LEAVE TO APPEAL —No. C-07-03483 RMW

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Chapter 11 petitions, which have since been jointly administered. Memorandum Decision and Order

on Motion to Appoint a Chapter 11 Trustee, Motion to Convert Case, and Motion to Disqualify

Pillsbury Winthrop Shaw Pittman LLP and for Disgorgement of Attorneys' Fees, Case Nos. 03-

51775, 03-51776, 03-51777 and 03-51778-MM at 3 (Bankr. N.D. Cal. Mar. 26, 2007). Over the

course of the next four years, egregious conflicts of interest came to light, culminating in a motion

by the United States Trustee to disqualify the debtors' counsel and to request appointment of an

independent trustee. See generally id. at 2-13. The bankruptcy court explained that these conflicts

"resulted in the complete breakdown of creditor confidence." Id. at 1. Citing "substantial concerns"

and a need to "restore creditor confidence in the bankruptcy system and to assure that there is no

lingering taint from PWSP's representation of the debtor," the court ordered the appointment of a

"strong, neutral trustee, who has no connections to any interested party." Id. at 16. Per the court's

order, the United States Trustee appointed Dennis J. Connolly of Alston & Bird LLP to serve as

trustee to SONICblue. Notice of Appointment of Chapter 11 Trustee, Case No. 03-51775 (Bankr.

N.D. Cal. April 16, 2007). The court approved the appointment the next day. Order Approving

Appointment of Chapter 11 Trustee, Case No. 03-51775 (Bankr. N.D. Cal. April 17, 2007).

Around two weeks later, the Trustee applied to the court for authorization to appoint his law

firm, Alston & Bird LLP, as trustee's counsel. In his application, the Trustee gave the following

reasons for selecting Alston & Bird as trustee's counsel.1

 First, the Trustee explained that "this is a

very complex case from the perspective of the issues that remain." Application for an Order

Authorizing Retention, Case Nos. 03-51775, 03-51776, 03-51777 and 03-51778-MM at 3 (Bankr.

N.D. Cal. May 2, 2007). ¶ 5. These issues include the need for an investigation of the facts and

issues surrounding Pillsbury's disqualification from representing SONICblue and any resulting

appropriate action. Id. In addition to this sensitive investigation and possible litigation, the Trustee

also identified the need for counsel to help determine "claims allowance, distributions to creditors,

and plan confirmation." Id. ¶ 6. Accordingly, the Trustee believed that the need for a "strong trustee

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ORDER DENYING YORK CREDIT OPPORTUNITIES FUND'S MOTION FOR LEAVE TO APPEAL —No. C-07-03483 RMW

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with the appropriate qualifications and without connections to this case and this legal community"

applied equally to his choice of counsel. Id. ¶ 5.

To assist him, the Trustee selected his law firm, Alston & Bird, and in particular, three

attorneys: Neal Batson, Steve Collins, and Grant Stein. Id. ¶ 7. These attorneys each possess

specialized skills that will aid the Trustee through this bankruptcy. Mr. Batson has served as an

examiner in many high-profile cases and will assist in determining SONICblue's strategy. Id. ¶ 8. 

Mr. Collins is Alston & Bird's ethics partner and his expertise will help the Trustee evaluate possible

claims against SONICblue's counsel. Id. ¶ 9. Mr. Stein is the head of Alston & Bird's bankruptcy

practice and will help oversee negotiations and secure confirmation of a plan for exiting the

bankruptcy. Id. ¶ 10. The Trustee submitted that the "extreme importance" of this case required

retention of attorneys in whom he has "full and complete confidence" and that "alternative counsel

would not be best suited to assist the Trustee in completing his job." Id. ¶ 11. The Trustee has

agreed to pay Alston & Bird its standard hourly rates. Id. ¶ 12. These hourly rates vary, from $750

for Batson, $660 for Collins, and $625 for Stein, to $320-$430 for their associates. Id. The

paralegal's standard hourly rate is $160. Id.

The court approved the appointment on an interim basis on May 9, 2007 and scheduled a

hearing on the appointment on June 14, 2007. Interim Order Authorizing Retention of Alston &

Bird LLP, Case No. 03-51775 (Bankr. N.D. Cal. May 9, 2007). The order set May 31, 2007 as a

deadline for objections. Id. at 3. York filed untimely objections to the appointment on June 7, 2007,

which the bankruptcy court permitted. In responding to the objection, the Trustee filed a reply that

expanded on his retention application. See Connolly Decl., Case Nos. 03-51775, 03-51776, 03-

51777 and 03-51778-MM (Bankr. N.D. Cal. June 12, 2007). In particular, the Trustee emphasized

Batson and Collins' involvement in examining the conduct of attorneys in the Enron bankruptcy. Id.

¶ 9. The Trustee noted that "[a]lthough there are a number of lawyers throughout the country who

have been involved in significant investigations and examination, I do not believe that those lawyers

have been involved in quite the same qualitative analysis of the conduct of attorneys as that in the

Enron investigation." Id. ¶ 10. How the Enron and SONICblue bankruptcies are similar is not

explained in the declaration. Beside their experience, the Trustee noted a few additional reasons for

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2

 The Trustee received solicitations from unnamed California law firms, but the Trustee chose not to

consider any West Coast counsel "as that may have created an entirely different set of issues with

connections with counsel for the various parties as well as the parties themselves." Connolly Decl.,

¶ 12.

ORDER DENYING YORK CREDIT OPPORTUNITIES FUND'S MOTION FOR LEAVE TO APPEAL —No. C-07-03483 RMW

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retaining Alston & Bird. The Trustee explained that, "[a]s a matter of logistics, the retention of

A&B certainly reduces the time needed to educate another firm as to the approach to the litigation

investigation, as to the way in which the cases are to be handled, and, simply put, the way in which

the Trustee would propose to proceed. Thus, from an efficiency standpoint the retention of A&B

presents a significant advantage." Id. ¶ 11. Finally, the Trustee explained that "my judgment was

that the rates for the A&B lawyers are competitive, if not significantly so, to any lawyers in New

York, Washington D.C., Chicago, Dallas or Houston." Id. ¶ 12. The declaration does not disclose

what the rate structure would be for a team of bankruptcy attorneys in the listed cities, nor does it

state that the Trustee solicited any firm other than Alston & Bird. Id.2

At the hearing, the court heard argument from York, the Trustee, the United States Trustee,

and another creditor, SONICblue Claims. See generally Tr. of June 14, 2007 Hearing at 6-22. Only

York objected to the Trustee's selection of counsel. The United States Trustee remarked that "the

U.S. Trustee in this instance regards [Trustee selecting his own firm as counsel] as an asset, not a

liability, because Alston and Bird, the law firm, has those same skills as Mr. Stein [the Trustee's

counsel] has described. So we think it's a plus for the estate under these particular circumstances to

have Alston and Bird serve as trustee's counsel." Id. at 17:12-18. The court then noted the

importance of allowing the trustee the privilege of selecting his own counsel. at 20:15-21:4. The

court also noted that "It's clear from the record that Alston and Bird is qualified. And it's certainly

clear from the record that this is an extraordinary case that does require maybe special handling." 

Id. at 21:5-9. After temporarily adjourning, the court found that retaining Alston & Bird was in the

best interest of the estate and approved the retention application. Id. at 24:16-20. A week later the

court entered a final order authorizing Alston & Bird's retention as trustee's counsel. Final Order

Authorizing Retention of Alston & Bird LLP, Case No. 03-51775 (Bankr. N.D. Cal. June 21, 2007)

("Final Retention Order"). The final order reiterated the court's findings that (1) Alston & Bird is

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3

 At the hearing, both York and the Trustee conceded that the record for appeal is complete and

essentially briefed. Little additional insight to whether the bankruptcy court abused its discretion

would be gleaned from further briefing.

ORDER DENYING YORK CREDIT OPPORTUNITIES FUND'S MOTION FOR LEAVE TO APPEAL —No. C-07-03483 RMW

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disinterested and (2) that retaining A&B as trustee's counsel is in the best interest of the estate. Id. at

2.

York now moves to appeal the bankruptcy court's final order authorizing the retention of

Alston & Bird, arguing that the retention is not in the best interests of the estate.

II. ANALYSIS

A. Leave to Appeal

York notes that the bankruptcy court's order authorizing the retention of Alston & Bird was

interlocutory, which neither the Trustee nor the United States Trustee dispute. The Ninth Circuit has

held that an order concerning an appointment of counsel is an interlocutory order. In re S.S. Retail

Stores Corp., 162 F.3d 1230, 1232 (9th Cir. 1998) (per curiam).

The district court may grant its leave to review the bankruptcy court's interlocutory orders. 

28 U.S.C. § 158(a)(3). In exercising its discretion under this section, the court may grant leave "to

avoid wasteful litigation and expense where the appeal presents a meritorious issue on a controlling

question of law and an immediate appeal would materially advance the ultimate termination of the

litigation." In re Belli, 268 B.R. 851, 858 (9th Cir. BAP 2001); In re Roderick Timber Co., 185 B.R.

601, 604 (9th Cir. BAP 1995). This understanding of the court's discretion comes from similar case

law interpreting 28 U.S.C. § 1292(b), the provision allowing circuit courts to review interlocutory

orders certified by the district court for appeal. In re Belli, 268 B.R. at 858.

The issue presented by this motion is whether there is a meritorious question of whether the

bankruptcy court abused its discretion in authorizing the retention of Alston & Bird. After

reviewing the bankruptcy court's order and the extensive record of the proceedings below,3

 the court

finds that there is no meritorious question, as explained below. Accordingly, the court denies York

leave to appeal the bankruptcy court's order authorizing the appointment.

B. Scrutinizing the Trustee's Retention of Alston & Bird

A trustee may appoint attorneys to represent the estate or assist the trustee with court

approval. 11 U.S.C. § 327(a). If the trustee wishes to appoint his own law firm, however, the court

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ORDER DENYING YORK CREDIT OPPORTUNITIES FUND'S MOTION FOR LEAVE TO APPEAL —No. C-07-03483 RMW

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must find that doing so would be "in the best interest of the estate." 11 U.S.C. § 327(d); Kathryn J.

Derr & Angela K. Layden, Appointing the Trustee's Own Law Firm – Conflicts and Cases, 13-OCT

Am. Bankr. Inst. J. 26 (1994). When a trustee wishes to appoint his own law firm, he should

provide notice to creditors and the court should hold a hearing on the issue, as the court did in this

case. See In re Butler Indus., Inc., 101 B.R. 194, 197 (Bankr. C.D. Cal. 1989), aff'd 114 B.R. 695

(C.D. Cal. 1990).

While the case law interpreting "best interests" for the purposes of section 327(d) is sparse,

the issue of a trustee selecting his own firm to represent the debtor existed before the Bankruptcy

Code's passage. Judge Friendly remarked that "we do not think the retainer of a trustee's own firm is

a practice to be encouraged in substantial estates." In re Ira Haupt & Co., 361 F.2d 164, 168 (2d

Cir. 1966). The court further explained its policy concerns:

The reasons are plain enough. The conduct of bankruptcy proceedings not only

should be right but must seem right. Even when litigation is likely to be the trustee's

chief responsibility, there must always be doubt whether he can make a truly

disinterested determination that his own firm, no matter what its overall merit, is best

qualified to be his counsel in the circumstances of the particular case. [. . .] Some

creditors may doubt, as here, whether a trustee is able to take quite the same objective

and critical attitude toward the amount and quality of effort being put forward by his

own law firm that he would toward another. On the other hand, in contrast to the

situation in this case, there may be instances where creditors would believe the

relationship had caused a trustee to be overly litigious. Finally, even the most

experienced attorney who becomes a trustee in a complicated bankruptcy can benefit

from the advice of an independent general counsel; we need not go so far as the

familiar adage concerning self-representation by a lawyer to say that a second head is

not without value in such matters simply because the first is exceedingly good.

Id. at 168-69; accord SEC v. Kenneth Bove & Co., Inc., 451 F. Supp. 355, 358 (S.D.N.Y. 1978). In

sum, the court noted a number of reasons that counsel against a trustee selecting his own firm as

counsel, from the appearance of impropriety and maintaining creditor confidence to ensuring highquality representation.

The overhaul of the bankruptcy law changed the underlying substantive provisions, but not

the issue to be considered. In denying an application for a trustee to act as counsel, the bankruptcy

court for the Eastern District of Michigan suggested that use of section 327(d) should be "severely

limited so as to prevent abuse and the appearance of impropriety." In re Michigan Interstate

Railway Co., Inc., 32 B.R. 325, 326 (Bankr. E.D. Mich. 1983). The court believed the practice

could only be salutary for "estates of modest assets" where the appointment would be "more

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ORDER DENYING YORK CREDIT OPPORTUNITIES FUND'S MOTION FOR LEAVE TO APPEAL —No. C-07-03483 RMW

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efficient and less troublesome." In major bankruptcies with difficult issues, the court considered

appointing a trustee's firm as his own counsel "a very questionable practice." Id.

The bankruptcy court for the Central District of California echoed these sentiments in a large

manufacturer bankruptcy. In re Butler Indus., Inc., 101 B.R. 194 (Bankr. C.D. Cal. 1989); aff'd 114

B.R. 695 (C.D. Cal. 1990). In Butler, the trustee argued that he should receive wide latitude in

choosing his attorney. 101 B.R. at 196. The court disagreed, noting that 327(d) imposes a higher

standard. Id. The court suggested four illustrative situations that might justify appointing the

trustee's own law firm: (1) where the estate mainly consists of causes of action and counsel would

have to be paid out of any recoveries, (2) where there is not enough legal work to justify the cost of

outside counsel, (3) where substantial legal actions must occur immediately to preserve the estate, or

(4) where self-appointment will lead to a "substantial" reduction in costs to the debtor. Id. at 197. 

Again, the court recognized a policy of "limit[ing] severely" the use of the trustee's firm as counsel. 

Id. The district court reviewed the "illustrations" provided by the bankruptcy court, and affirmed. 

114 B.R. at 699.

A more recent case proposed an alternate interpretation of the "best interest of the estate" in

327(d). In re Interamericas, Ltd., 321 B.R. 830 (Bankr. S.D. Tex. 2005). The court in

Interamericas noted that "most relevant authority – including Butler – attempts to limit the retention

of the trustee's own firm to small cases." Id. at 834 (collecting cases). The court considered this

approach impossible to reconcile with the plain text of "best interest," and so proposed the following

nine-plus factor test to decide whether appointing the trustee's firm as counsel is in the estate's best

interest:

1. The qualifications of the members of the firm compared to the complexity of the

case;

2. Whether the firm is regularly hired by others to handle similar litigation;

3. Whether the anticipated litigation predominantly involves issues of bankruptcy law

with which the law firm has particularized expertise;

4. Whether the time commitment required to handle the case is consistent with the

size of the firm and the balance of the firm's time commitments;

5. Whether only a nominal amount of work must be performed;

6. The availability of other qualified firms to handle the case;

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ORDER DENYING YORK CREDIT OPPORTUNITIES FUND'S MOTION FOR LEAVE TO APPEAL —No. C-07-03483 RMW

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7. The rates charged by the firm compared to the rates charged by other qualified

firms;

8. Whether there will be material cost savings to the estate; and

9. Other case-specific factors.

Id. Both the Interamericas and Michigan Interstate/Butler decisions share a common emphasis of

requiring the trustee to demonstrate the wisdom of appointing his own firm counsel. While the lines

of cases differ in the illustrations they provide, a general concept emerges from all of them: absent a

showing of substantial savings and/or efficiencies, appointment of a trustee's own law firm as

counsel is not in the estate's best interest.

York argues in support of its motion that the bankruptcy court abused its discretion in finding

that the Trustee had made such a showing. The court disagrees. The hearing transcript of the

bankruptcy court's factual findings notes that, "It's clear from the record that Alston and Bird is

qualified. And it's certainly clear from the record that this is an extraordinary case that does require

maybe special handling." Tr. of June 14, 2007 Hearing at 21:5-9. As summarized in the

background section above, the Trustee's chosen counsel have excellent reputations and rare

experience in handling difficult bankruptcy cases. The court also notes that York does not challenge

Alston & Bird's qualifications. Upon reviewing the Trustee's submissions in support of his choice of

Alston & Bird, the bankruptcy court did not err in concluding that the law firm is qualified to assist

in this case.

The bankruptcy court was also correct in finding that this is an extraordinarily delicate case. 

While the appointment of a trustee's own law firm is generally a "very questionable" practice

because of the danger of self-dealing, the bankruptcy court did not abuse its discretion in finding that

the nature of this case justified departing from that general rule. Over these bankruptcy proceedings,

the Trustee will have to review hundreds of thousands of privileged documents and exercise

judgment in deciding what, if any, claims to bring against various attorneys who previously

participated in the bankruptcy. This difficult investigation will require countless judgment calls, for

which the Trustee will have to solicit counsel's advice. In this extraordinary situation, the

bankruptcy court did not abuse its discretion in finding that it will be in the estate's best interest for

the Trustee to rely on his partners and associates in handling these tasks. By using his firm, the

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ORDER DENYING YORK CREDIT OPPORTUNITIES FUND'S MOTION FOR LEAVE TO APPEAL —No. C-07-03483 RMW

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Trustee will not have to "educate another firm as to [his] approach to the litigation" or "the way in

which the Trustee would propose to proceed." Connolly Decl., ¶ 11. The bankruptcy court did not

abuse its discretion in finding that the Trustee's comfort with and knowledge of his firm's attorneys

would present a "significant advantage" from an "efficiency standpoint." Id.; see Tr. of June 14,

2007 Hearing at 21:5-9 (citing record).

York argues that leave to appeal should be granted because the bankruptcy court applied the

wrong standard for determining "best interest," based on the bankruptcy court's citation of In re

Mandell, 69 F.2d 830 (2d Cir. 1934). See Tr. of June 14, 2007 Hearing, 20:18-21:4. In Mandell, the

court appointed an attorney for the trustee against the trustee's wishes. 69 F.2d at 831. The court

would not completely rule out appointing counsel for the trustee over the trustee's objections, but

generally considered it "inimical to good administration." Id. In the end, the case stands for the

proposition that the court should not interfere with the trustee's choice of counsel, but that the court

should let the trustee make the selection of counsel in the first instance. Id. ("[A conflict] may have

justified the court in declining to approve their employment, but no reason appears why the trustee

should not have been allowed to nominate another attorney satisfactory both to himself and to the

court.").

Mandell's statement that "only in the rarest of cases should the trustee be deprived of the

privilege of selecting his own counsel," id., was made in a context very different from the one here. 

However, the court does not believe the bankruptcy court relied on Mandell for its legal standard,

but for its policy emphasizing the "personal faith and confidence" a trustee must have in his counsel

and the "highly confidential" nature of their relationship. See Tr. of June 14, 2007 Hearing, 20:23-

21:4. The court is confident that the bankruptcy court applied the proper, section 327(d) standard

because the bankruptcy court later made an explicit finding that the representation was "clearly" in

the best interest of the estate. Id. at 24:17-20. The bankruptcy court reiterated that finding, and

made no mention of Mandell, in its written final order authorizing the retention. Final Retention

Order at 2.

Given that the Trustee is trying to extract this bankruptcy proceeding from a "complete

breakdown of creditor confidence," the decision to appoint his own law firm does present some

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concern. Nevertheless, the bankruptcy court approved the appointment based on a detailed record,

which included a thorough explanation of the Trustee's reasoning and the explicit endorsement of

the United State Trustee. In light of such substantial evidence of Alston & Bird's qualifications and

integrity, the court cannot find merit in questioning whether the bankruptcy court abused its

discretion in approving their retention in this extraordinary case.

III. ORDER

For the foregoing reasons, the court denies York leave to appeal. The clerk may close the

file.

DATED: 11/9/07

RONALD M. WHYTE

United States District Judge

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Notice of this document has been electronically sent to:

Counsel for Appellant, York Credit Opportunities Fund L.P.:

Michael St. James ecf@stjames-law.com

Michael St. James Michael@stjames-law.com

Counsel for Appellee, Dennis J. Connolly:

Robert Edward Clark rclark@friedumspring.com

Cecily A. Dumas cdumas@friedumspring.com

Counsel for Debtor, SONICblue, Inc.:

Austin K. Barron abarron@omm.com

Richard Alan Rogan rrogan@jmbm.com

Counsel for Office of the U.S. Trustee:

Todd Morris Arnold tma@lnbrb.com

Notice of this document has been mailed to:

Counsel for Office of the U.S. Trustee:

Nannette Dumas 

Office of the U.S. Trustee

280 South First Street

#268

San Jose, CA 95113

Shannon L. Mounger-Lum 

Office of the U.S. Trustee

280 South First Street

Suite 268

San Jose, CA 95113-0002

Counsel for Debtor-in-Possession, Sonicblue Inc.:

Mark Porter 

Law Offices of Fenwick and West

275 Battery Street

#1500

San Francisco, CA 94111

Matthew A. Gold 

Argo Partners

12 W 37th Street

9th Floor

New York, NY 10018

Anne E. Wells 

Levene Neale Bender Ranklin & Brill LLP

10250 Constellation Blvd.

#1700

Los Angeles, CA 90067

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ORDER DENYING YORK CREDIT OPPORTUNITIES FUND'S MOTION FOR LEAVE TO APPEAL —No. C-07-03483 RMW

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U.S. Bankruptcy Court

Marilyn Morgan

U.S. Bankruptcy Court

280 South First Street

Room 3035

San Jose, CA 95113

USBC Manager-San Jose

USBC Manager-San Jose

US Bankruptcy Court

280 South First Street

Room 3035

San Jose, CA 95113

Counsel are responsible for distributing copies of this document to co-counsel that have not

registered for e-filing under the court's CM/ECF program.

Dated: 11/9/07 TSF

Chambers of Judge Whyte

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