DBSI INC: Creditors Committee Seeks to File Competing Plan

The official committee of unsecured creditors in the Chapter 11 cases of DBSI, Inc. and its affiliated debtors asks the U.S. Bankruptcy Court for the District of Delaware for an order

(l)(a) pursuant to 11 U.S.C. Sec. 1121(d) terminating the
Debtors' exclusive rights under 11 U.S.C. Sec. 1121
solely to allow the Committee to file and solicit
acceptances of a chapter 11 plan, or, in the
alternative,

(b) pursuant to 11 U.S.C. Sec. 1104(a) directing the
appointment of a trustee to be in possession, and to
manage the affairs and operations, of the Debtors'
estates in replace of the Debtors; and

(2) further continuing the hearing on the Debtors' disclosure
statement.

As reported by the TCR on May 13, 2009, DBSI Inc. and its debtor-affiliates delivered to the Court a joint Chapter 11 plan of liquidation, which creates a liquidating trust on the plan's effective date. Under the plan, among other things, holders of unsecured claims against the Debtors will receive a pro rata share. However, the Debtors' plan did not indicate the estimated recovery that unsecured creditors would receive. A full-text copy of the Debtors' Joint Chapter 11 Plan of Liquidation is available for free at http://ResearchArchives.com/t/s?3cbd

Dennis A. Meloro, Esq., at Greenberg Traurig LLP, in Wilmington, Delaware, asserts that DBSI's "beleaguered and conflicted" insider management to should now cede control over the plan process. "These chapter 11 cases began under the cloud of fraud allegations and distrust, darkened by a class action securities fraud suit and further darkened by the Debtors' misguided attempts to obtain insider releases and other concessions via a self-inflicted threat to immediately reject their entire TIC master-lease portfolio."

Non-Filed Entities

The Creditors Committee notes that 181 DBSI affiliates have sought chapter 11 relief in the jointly administered cases, but there are many more Non-Filed Entities that remain outside of chapter 11 protection. Collectively, the Debtors and the Non-Filed Entities comprise a vast byzantine network of interconnected interests in numerous commercial real estate and non-real estate projects and businesses.

According to Mr. Meloro, after a careful review by the Committee (and the examiner appointed in the Chapter 11 cases) of the Debtors' schedules of assets and liabilities and the disclosure statement to their proposed Plan, these fundamental truths have emerged:

-- An entire universe of DBSI entities (the "Non-Filed
Entities") with untold assets have been obscured and excluded
from the Chapter 11 proceedings, despite a vast web of
intercompany claims that binds them to the Debtors under the
purview of the Court; and

-- The pervasively overlapping insider ownership of these Non-
Filed Entities creates significant conflicts of interest that
have rendered DBSI management incapable of honoring their
fiduciary duties to proceed with a chapter 11 plan designed
to further the best interests of the estates.

The Committee relates the Non-Filed Entities include Kastera, LLC and subsidiaries DBSI Investments Limited Partnership, Stellar Technologies LLC and several subsidiary technology companies, DBSI Redemption Reserve, numerous limited partnerships in which DBSI'Inc., DBSI Investments Limited Partnership and DCI, Inc. are general partners, numerous special purpose entities (generally limited liability companies), dissolved partnerships and other miscellaneous entities.

Mr. Meloro asserts that the overlap among the DBSI Debtors and the Non-Filed Entities and the sweeping entanglement among their financial affairs are demonstrated by these intercompany claims and transfers:

-- A $192 million claim by DBSI Inc. against DBSI Redemption
Reserve.

-- A $124 million claim by DBSI Redemption Reserve against
Stellar Technologies LLC. Stellar is a holding company for
various technology companies, which appear to have been the
ultimate recipients of substantial investments that were
down-streamed from DBSI Redemption Reserve.

-- A $99.8 million claim by DBSI Redemption Reserve against
DBSI Investments Limited Partnership. The Committee and
the examiner continue to investigate the extent to which
DBSI Investments Limited Partnership distributed these
funds to its insider general partners and/or its controlled
limited partnership subsidiaries or otherwise.

-- A $28.5 million claim by DBSI 2008 Notes Corporation
against Stellar. This claim may be secured by Stellar's
ownership interest in technology companies.

-- A $13 million claim by DBSI Guaranteed Capital Corporation
against Stellar. This claim may be secured by Stellar's
ownership interest in technology companies.

-- A $9 million claim by DBSI Real Estate Funding Corporation
against DBSI Investments Limited Partnership.

-- An $8.8 million claim by DBSI 2008 Notes Corporation
against DBSI Western Technologies LLC, which is the holding
company for Non-Filed Entity DBSI Western Electronics LLC.

-- A $7.8 million claim by DBSI Redemption Reserve against
Western Technologies.

-- A $7 million claim by DBSI Inc. against Kastera LLC.

-- A $7 million claim by DBSI 2006 Secured Notes Corporation
against Kastera Homes LLC. Kastera Homes LLC borrowed from
DBSI 2006 Notes Corporation to fund its development of
certain residential real estate projects. The Kastera
Homes LLC borrowings are secured by mortgages and deeds of
trust in favor of DBSI 2006 Notes Corporation in the
underlying real estate.

-- A $6.5 million claim by REF against DBSI Redemption
Reserve.

-- A $3.7 million claim by DBSI Guaranteed Capital Corporation
against Western Technologies, which may be secured by
Western Technologies' ownership interest in DBSI Western
Electronics LLC.

-- A $2.1 million claim by REF against Kastera Homes LLC. REF
also lent funds to Kastera Homes LLC for the development of
residential real estate projects, which loans are secured
by mortgages and deeds of trust in favor of REF in the
underlying real estate.

According to the Committee, aside from the intercompany claims, the Debtors directly or indirectly own majority interests in the Non-Filed Debtors.

During plan negotiations, the Committee inquired of the Debtors how they intended to resolve these significant Non-Filed Entity issues. After months of asking, the Committee received the answer that the Debtors will not proceed with a plan that makes any attempt to incorporate the Non-Filed Entities in any way.

Fiduciary Duties

"Whether the Debtors are motivated by pie-in-the-sky visions of retaining value or simply setting up a new scheme to leverage releases, the Debtors are not honoring their fiduciary duties to maximize value for the benefit of the estates and their constituencies," Mr. Meloro contends. "Instead, the Debtors are plainly acting to further the conflicted self-interests of others."

After reviewing its options, the Committee believes that terminating exclusivity solely to allow the Committee to files its own plan and disclosure statement will best serve the interest of the Debtors' estates.

The Debtors, Mr. Meloro points out do not have the resources and liquidity to endure a protracted stay in chapter 11. He says confirmation of DBSI's plan, which fails to incorporate the Non-Filed Entities, will only expose a liquidating trustee to future litigation and continued attempts to assert control by the DBSI insiders.

The Committee states is preparing and will be prepared to file a plan and disclosure statement that will actively engage the Non-Filed Entity issues and leave a post-confirmation liquidating trustee in control of the assets from which distributions to creditor beneficiaries will be generated. Other than addressing the crucial issue of how to incorporate the Non-Filed Entities, the Committee's plan does not require substantial modification to the Debtors' plan. Thus, the double-track confirmation process can proceed apace (and benefit from at least the preliminary results of the examiner's investigation), Mr. Meloro contends.

"A competing plan process will prevent the Debtors from forcing creditors to choose between an incomplete plan that omits the Non-Filed Entities and no plan at all," Mr. Meloro points out.

If the Court is not inclined to terminate exclusivity to allow competing chapter 11 plans, the Committee proposes that the Court appoint a chapter 11 trustee. Mr. Meloro asserts that absent the ability for the Committee to propose a plan, a neutral third party not only to investigate the Debtors' affairs (as is being done by the examiner), but also to have and exercise the authority to manage those affairs through the chapter 11 plan process, is necessary.

Committee's Plan

The Committee intends to file a competing plan that largely mirrors the Debtors' plan with the addition of several key provisions to address the Non-Filed Entities, including:

-- The Committee's plan will address the intercompany claims
among Debtors and Non-Filed Entities -- particularly those
involving DBSI Redemption Reserve Fund and DBSI
Investments Limited Partnership;

-- The Committee's plan will include a mechanism for the direct
transfer of the Kastera Collateral and the resolution of
claims among the Debtors and the Kastera affiliates;

-- The Committee's plan will include a mechanism to vest the
liquidating trust with the technology company claims and
ownership interests held by Stellar and Western;

-- The Committee's plan will specifically delineate the
transfer of other Non-Filed Entities and assets, and the
resolution of other claims among Debtors and Non-Filed
Entities.

According to Mr. Meloro, in contrast to the Debtors' plan, the Committee's plan will (i) be accompanied by full and complete disclosure regarding the Debtors and the Non-Filed Entities, (ii) maximize value for the benefit of the Debtors' estates and constituents, (iii) ensure that a post-confirmation liquidating trust will not be handcuffed by third-party disputes, and (iv) provide the closure and certainty that parties in interest need to move on from these very difficult chapter 11 cases.

Accordingly, the Committee proposes this plan schedule in the event that the Court terminates exclusivity for the Committee to files its plan:

* June 29, 2009 - Committee files its plan and disclosure
statement (the Debtor should file revised
plan and disclosure statement prior to this
date).

* July 28, 2009 - Examiner files preliminary report.

* July 31, 2009 - Committee and Debtors file amended
plans/disclosure statement(s) with any
revisions prompted by examiner report.

* Aug. 4, 2009 - Continued hearing on Committee/Debtor plans
and disclosure statement(s).

* Aug. 25, 2009 - Confirmation objection deadline for
Committee-Debtor plans.

* Aug. 31, 2009 - Confirmation hearing for Committee/Debtor
plans.

About DBSI Inc.

Headquartered in Meridian, Idaho, DBSI Inc. and its affiliates were engaged in numerous commercial real estate and non-real estate projects and businesses.

On November 10, 2008, and other subsequent dates, DBSI and 180 of its affiliates filed for Chapter 11 protection (Bankr. D. Del. Lead Case No. 08-12687). Lawyers at Young Conaway Stargatt & Taylor LLP represent the Debtors as counsel. The Official Committee of Unsecured Creditors tapped Greenberg Traurig, LLP, as its bankruptcy counsel. Kurtzman Carson Consultants LLC is the
Debtors' notice claims and balloting agent. When the Debtors
filed for protection from their creditors, they listed assets and
debts both between $100 million and $500 million.

Joshua Hochberg, a former head of the Justice Department fraud unit, has been named examiner to investigate allegations of fraud by the Debtors and their management.


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