DIP Financing-Update

On November 20, 2006, the Court entered an interim order approving debtor-in-possession financing in the amount of $350,000 from Bear Sterns Investment Products, Inc. ("Bear Sterns"). The interim order authorizes use of the $350,000 in conjunction with an approved budget which is designed to meet some of the Debtors' emergent needs, including, among other things, insurance, security for the developments and payroll.

In connection with the Bear Sterns financing, on an interim basis, Bear Sterns was granted a lien on all avoidance actions (preferences, fraudulent transfers, etc.) in addition to junior liens on all the debtors' real estate assets.

The Committee and its professionals, in conjunction with the Debtors and their professionals, are in the process of negotiating a final order and attempting to address certain of the concerns raised by the Court at the interim hearing, as well as the substantial objections raised by the Debtors' secured lenders, alleged mezzanine lenders, construction lien claimants and vendee lien claimants.

To that end, there has been established an aggressive discovery and deposition schedule over the next week to address the concerns and objections raised.

The final hearing is scheduled for December 1, 2006 at 9:00 am and will determine if the balance of the proposed $2.6 million in DIP Financing will be advanced to the Debtors to fund operations consistent with a proposed budget.

Committee Disclaimer

Please be advised that this web site is for informational purposes only. Nothing herein is or is intended to constitute legal advice. The Committee, in seeking to satisfy their obligations and duties under the Bankruptcy Code, has established this web site to keep general unsecured creditors informed of developments in these bankruptcy cases.

Individual questions concerning creditor specific concerns will not likely be addressed on this site, and it is recommended that individual creditors retain their counsel with respect to their claims and interests.

Summary of 11/13 Omnibus Hearing Date

On November 13, 2006, the following matters were scheduled to be heard by the Court:

1) United States Trustees' motion to appoint a Chapter 11 trustee (the "Trustee Motion"),
2) Debtors' application to retain Traxi, LLC ("Traxi") to provide crisis management services to the Debtors, employ Perry Mandarino as Chief Restructuring Officer of the Debtors ("CRO"), and establish a three member Board of Directors consisting of Zudhi Karagzoji and two independent board members to oversee the Debtors reorganization (the "Traxi Motion"),
3) Secured lender's motion to convert the Debtors’ cases to cases under Chapter 7 (the "Conversion Motion");
4) Debtors' application to retain Sullivan and Company, Inc. as financial advisor to the Debtor;
5) Motion to compel Debtor to assume or reject executory contracts on behalf of Bond Safeguard Insurance Co. and Lexon Insurance, Co.;
6) Continued application regarding Debtors' authority to continue to sell homes in the ordinary course.

At the hearing, the Court adjourned the Debtors' application to retain Sullivan and Company, Inc. as Financial Advisor to the Debtors, the motion to compel Debtor to assume or reject executory contracts on behalf of Bond Safeguard Insurance Co. and Lexon Insurance, Co., and the Application regarding Debtors' authority to continue to sell homes in the ordinary course until the next omnibus hearing date on November 27, 2006 at 1:00 pm.

The Court denied the Conversion Motion without prejudice, determining that at this early stage in the reorganization process, the appointment of a chapter 11 trustee was not appropriate. The Court did however, approve the Traxi Motion and the appointment of the CRO. In granting the Traxi Motion, the Court required the Debtors to identify the independent board members and obtain affidavits certifying that the proposed board members do not have a relationship with the Debtors or any creditors and do not possess an interest in these bankruptcy cases.

The Committee selected two individuals, William Weber, the Principal and CEO of Weber Homes, having its principal place of business in Basking Ridge, New Jersey, and James Corbett, a Division President for D.R. Horton, Inc., a developer of distinctive detached and attached housing communities to serve as the independent board members. Affidavits disclosing their disinterestedness will be filed with the Court shortly.


The next omnibus hearing date is scheduled for Monday, November 27, 2006 at 1:00 p.m.

Summary of Motion to Continue Sale of Homes

At the omnibus hearing on, the Debtors sought final approval to continue to sell homes in the "ordinary course of business."

The Committee objected to the relief requested, but recognized the Debtors' need to move forward on the sales of homes that are completed and ready to close as a means of reducing the secured debt on the Debtors' projects and providing some liquidity for the completion of additional homes. With regard to ten (10) identified homes currently ready to close, the Debtors, the Committee and the various project lenders have had negotiated a form of order that will address the parties' concerns and facilitate those closings.

The Debtors' general request for authority to sell homes in the ordinary course was subject to multiple objections from various parties including the Committee. The Committee's objection was based on the fact that it was not in a position to consent to the Debtors being given unfettered advance approval to sell homes. At the time of the motion, the Committee had not been provided with a completion analysis with regard to the Debtors' projects, nor had the Committee had the opportunity to prepare such an analysis on its own. That analysis is needed to determine, in the first instance, the economic viability of the Debtors' projects and will dictate whether the estates' best interests are served by completing and closing additional homes, as opposed to selling some or all of the Debtors' projects, "as is," to other developers.

Moreover, the Committee had no visibility as to the appropriate pricing for homes in the various geographic areas in which the Debtors' projects are located. In short, the Debtors' request to sell homes in the "ordinary course" was, in the opinion of the Committee and its professionals, premature.

However, the Committee did propose that it confer with the Debtors and the project lenders and devise a procedure that will include: (a) reasonable advance notice to the Committee and relevant project lenders of proposed closings, with an opportunity to object and be heard on short notice if any objection cannot be resolved; (b) a mechanism for the payment of proceeds to secured creditors, subject to the Committee's right to investigate and challenge liens; and (c) the ability to close on sales and maintain proceeds in escrow in the event there is a dispute regarding the entitlement of an alleged secured creditor (including an alleged construction lien claimant) to sale proceeds.

The continued hearing on the Debtors' motion to continue the sale of homes is scheduled for 11/13/06 at 1:00 pm.

Debtors' Professionals and Applications to Retain Additional Professionals

The Debtors have retained Greenbaum, Rowe, Smith & Davis LLP as bankruptcy counsel for these matters. The attorneys responsible for the engagement are:

David L. Bruck, Esq.
Robert S. Underhill, Esq.

The Debtors have also moved for authorization to retain Sullivan & Company as financial advisors to the Debtors. The application remains pending before the Court and is subject to objections field by the Committee of Unsecured Creditors and the Office of the United States Trustee. A hearing on the application will be scheduled shortly.

The Debtors have also sought to engage Traxi LLC as crisis managers and to provide a chief restructuring officer, Perry Mandarino, to manage the day-to-day operations, under the supervision of an independent, three member Board of Directors. The application is pending before the Court and will be heard at the omnibus hearing date of 11/13/06 at 1:00 pm before Judge Kaplan.

Important Dates for Creditors

The following are important dates for creditors in these bankruptcy cases:

Section 341(a): Initial Meeting of Creditors scheduled for 11/16/06 at 10:00 am at Room 129, Clarkson S. Fisher Courthouse, Trenton, New Jersey.

Proofs of Claim Deadline: 2/14/07.


Please make note of these dates. If you have not received a proof of claim in these cases or have misplaced the form, please contact Cynthia Braden at cbraden@coleschotz.com for a replacement form.

Committee Selects Professionals

The Committee has elected to retain Cole, Schotz, Meisel, Forman & Leonard, P.A. as its counsel in these matters and an applications seeking to approve Cole Schotz's retention is pending with the Bankruptcy Court. The attorneys responsible for this engagement are:

Michael D. Sirota, Esq.
Warren A. Usatine. Esq.
Mark J. Politan, Esq.

The Committee has also elected to retain J.H. Cohn LLP as its financial advisors in these matters and an application to approve the retention is pending in the Bankruptcy Court. The professionals responsible for the engagement are:

Bernard A. Katz, Partner
Howard Konicov, Partner
Vincenzo Toppi, Manager

Official Committee of Unsecured Creditors Appointed by the Office of the United States Trustee

On October 23, 2006, the Office of the United States Trustee (the “UST”) appointed the Official Committee of Unsecured Creditors (the “Committee”). The Committee consists of the following members: (a) Strober Building Supply, Inc., (b) Home Remodeling Concepts, Inc., (c) Sunrise Concrete Company, Inc., (d) Woodhaven Lumber & Millwork, Inc., (e) Veena and Harish Nagarsheth, (f) June Madia, and (g) Liz and Femi Palmer.

Kara Homes, Inc. and 21 affiliates file Chapter 11

On October 5, 2006, Kara Homes, Inc. (“Kara Homes”) filed a voluntary petition in this Court for relief pursuant to Chapter 11 of Title 11, United States Code (the “Bankruptcy Code”).

On October 9 and 10, 2006, each of the Affiliates also filed a voluntary petition pursuant to Chapter 11 of the Bankruptcy Code. Since their respective filing dates, the Debtors have remained in possession of their assets and continued in management of their businesses as debtors-in-possession pursuant to Section 1107 and 1108 of the Bankruptcy Code. The Debtors' cases are being jointly administered under the main case number 06-19262 (MBK).

Based on its filings to date, Kara Homes is the 90% member of each of the Affiliates. The Affiliates are limited liability companies that own and operate the several residential development projects that comprise the Debtors’ business operations.