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RON BENDER (SBN 143364) JACQUELINE L. RODRIGUEZ (SBN 198838) TODD M. ARNOLD (SBN 221868) JOHN-PATRICK M. FRITZ (SBN 245240) LEVENE, NEALE, BENDER, RANKIN & BRILL L.L.P. 10250 Constellation Boulevard, Suite 1700 Los Angeles, California 90067 Telephone: (310) 229-1234; Facsimile: (310) 229-1244
Email: rb@lnbrb.com; jlr@lnbrb.com; tma@lnbrb.com; jpf@lnbrb.com

Proposed Attorneys for Chapter 11 Debtors and Debtors in Possession UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA (SANTA ANA DIVISION) In re: WESTCLIFF MEDICAL LABORATORIES, INC., Debtor. _______________________________ BIOLABS, INC., Debtor. _______________________________ Affects Both Debtors Affects WESTCLIFF MEDICAL LABORATORIES, INC. only Affects BIOLABS, INC. only [Proposed] Lead Case No. 8:10-bk-16743 [Proposed] Jointly Administered with Case No. 8:10-bk-167461 Chapter 11 Cases APPLICATION FOR ORDER SETTING HEARING ON SHORTENED NOTICE ON DEBTORS MOTION TO (1) ASSUME SETTLEMENT AGREEMENT AND MUTUAL RELEASE, OR, ALTERNATIVELY, (2) APPROVE SETTLEMENT AGREEMENT AND RELEASE RE QUI TAM LITIGATION; DECLARATION OF MATTHEW PAKKALA IN SUPPORT THEREOF [LBR 9075-1(b)]

Westcliff 23 BioLabs, 24 25 the 26 27

1

Medical

Laboratories, and,

Inc.

(Westcliff) Westcliff,

and the

Inc.

(BioLabs

together

with

Debtors), the Chapter 11 debtors and debtors in possession in above-captioned cases, hereby apply, by way of this

28

Motion for Joint Administration pending.

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application (the Application) and LBR 9075-1(b) for an order setting a hearing on shortened notice on Debtors motion (the Motion) for the entry of an order (1) authorizing the Debtors to assume the Settlement Agreement and Release (the Settlement Agreement) Debtors, entered the into State pre-petition of by and among (a) the the

(b)

California,

acting

through

California Department of Justice (the DOJ), (c) the Office of the Attorney General, Bureau of Medi-Cal Fraud and Elder Abuse (BMFEA), (d) the California Department of Health Care Services (DHCS and, together with the DOJ and BMFEA, California), (e) Hunter Laboratories LLC (Hunter), and (e) Chris Riedel

(Riedel and, together with Hunter the Plaintiffs) pursuant to 11 U.S.C. 365(a), or, alternatively, (2) approving the

Settlement Agreement pursuant to Fed.R.Bankr.P. 9019(a), which Motion was filed on May 19, 2010. The Debtors filed their voluntary Chapter 11 bankruptcy

cases on May 19, 2010 (the Petition Date). Biolabs owns 100% of the equity of Westcliff and has no other material assets. Prior to the Petition Date, the

Plaintiffs initiated a qui tam action (the Qui Tam Action) against Westcliff and other non-debtor, non-affiliated entities asserting California claims False on behalf Act. of California State of pursuant to the later

Claims

The

California

intervened into the Qui Tam Action. Action, Plaintiffs and California

By way of the Qui Tam asserted that, Westcliff

submitted false claims for payment to Medi-Cal because Westcliff (1) charged Medi-Cal more for laboratory tests than Westcliff

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charged to other customers for the same laboratory tests, and (2) improperly offered discounts to other customers to induce them to refer more Medi-Cal business to Westcliff. Westcliff faces

billions of dollars in potential liability in the Qui Tam Action. After the Qui Tam Action was initiated, Westcliff entered into a tolling agreement pursuant to which Westcliff was dismissed from the Qui Tam Action, without prejudice, so the parties could

attempt to reach a settlement. Before the Petition Date, on or about May 13, 2010, after substantial, arms-length negotiations, the Debtors, California, and the Plaintiffs entered into the Settlement Agreement. A true

and correct copy of the Settlement Agreement is attached to the Motion as Exhibit 1. Also before the Petition Date, after substantial, arms-

length negotiations, the Debtors entered into an Asset Purchase Agreement (the APA) all of to effectuate Debtors its a sale assets (the to Sale) of

substantially Corporation of

the and

Laboratory Wave

America

wholly-owned

subsidiary

Newco, Inc. (Purchaser), or an overbidder.

Motions to approve

the bidding procedures and sale contemplated by the APA have already been, or soon will be, filed with the Court (the Sale Procedures Motion and the Sale Motion, respectively). The

purchase price under the APA is $57.5 million, subject to certain adjustments (the Sale Price). The Debtors and MTS Health

Partners, LP, the Debtors financial advisor that extensively marketed the Debtors assets pre-petition, believe that the

purchase price offered by Purchaser is substantially higher than

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the purchase price that any other buyer would be willing to pay for such assets. As set forth in Section 3.1 of the APA, the purchase price being paid by Purchaser will be adjusted downward if there is a meaningful reduction in Westcliffs post-petition business volume pending the closing of the Sale, and if that reduction gets too great and there is a material adverse change, Purchaser has the ability walk away from this transaction completely. The risks to

the Debtors estates of failing to close the Sale to Purchaser on an extremely expedited basis are therefore severe. The Debtors

have no doubt that if they fail to consummate their Sale to Purchaser, the Debtors will either end up selling their business for substantially less money than Purchaser has offered, or,

worse, the Debtors will have to shut down their business and liquidate, which would result in the loss of approximately 1,000 jobs and the decimation of any going concern value of the

Debtors business. have minimal value.

A liquidation of the Debtors business would

The Settlement Agreement provides, among other things, that, in exchange for a release of the claims in the Qui Tam Action and a dismissal of the Qui Tam Action, with prejudice, the Debtors will be required to pay California and the Plaintiffs 10% of the net sale proceeds of any Sale Transaction, which includes any sale of a majority of the Debtors assets (the Net Sale Proceeds Payment), prior to distributing any portion of the net sale proceeds to any other creditor. The proposed Sale of the

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Debtors assets to the Purchaser, or an overbidder, is a Sale Transaction within the meaning of the Settlement Agreement. The APA requires, among other things, that (1) there be a full and final settlement by all parties to the Qui Tam Action, (2) concurrently with the closing of the Sale, the Net Sale Proceeds Payment shall be made to California and the Plaintiffs, and (3) as of the closing date of the Sale, no party to the Settlement Agreement shall have a right to void the Settlement Agreement. As further discussed in the Motion, the Settlement Agreement is an executory contract, as performance remains due to some extent by the various parties to the Settlement Agreement such that non-performance would constitute a material breach relieving the other side from performance. Agreement and the Net Sale The approval of the Settlement Payment are essentially

Proceeds

conditions precedent to the closing of the Sale.

In an absence

of the Sale, the Debtors will not be able to close the Sale to the Purchaser, who, as mentioned above, offered substantially more for the Debtors assets than any other interested party. Accordingly, Debtors in the absence the of the Sale, the at a minimum, which the the

estates

would

lose

value

by

Purchasers offer for the Debtors assets exceeds the value the Debtors may obtain for such assets from another purchaser, if at, all. amounts The is Debtors believe that the the disparity Debtors be between to these lose a to

substantial. amount of

Thus,

stand made

substantial

funds

that

could

available

satisfy claims against the Debtors estates.

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However, it is more likely that a far greater detriment would be suffered by the Debtors and their estates if the Sale to the Purchaser is not consummated. generate enough revenue to remain The Debtors are unable to current on their debt

obligations and have only been able to survive over the past seventeen months because their primary secured creditor has

agreed to provide the Debtors with additional financing.

Thus,

if the Sale is not consummated and no other buyer can quickly be located, it is likely that, in the absence of additional

financing, the Debtors would be forced to immediately shut down their business and cease operations, which would decimate the going concern value of the Debtors business to the extreme

prejudice of creditors. In addition to the foregoing, if the Settlement Agreement is not assumed and consummated, Westcliff will have to continue to litigate the Qui Tam Action, which, pursuant to 11 U.S.C. 362(b)(4), is probably not subject to the automatic stay. Such

litigation would come at considerable expense to the estate, and the outcome of such litigation is not certain and may result in billions Likewise, of if dollars the in claims against Agreement the is Debtors not estates. and

Settlement

assumed

consummated, California may assert that it is entitled to offset and/or recoup claims against Medi-Cal receivables. Based on the foregoing primary reasons, and other reasons discussed below, the Debtors have determined, in an exercise of their business judgment, that it is in the best interests of the Debtors and their estates to assume the Settlement Agreement.

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Therefore, the Court should approve the Debtors assumption of the Settlement Agreement pursuant to 11 U.S.C. 365. For the same

basic reasons underlying the Debtors decision to seek to assume the Settlement Agreement, the Debtors have determined that the Settlement interests Agreement of the is fair, reasonable, and and in be the best

Debtors

estates

should

approved.

Therefore, in the event the Court determines that the Settlement Agreement is not an executory contract, the Court should approve the Settlement Agreement pursuant to Fed.R.Bankr.P. 9019(a). While section 7.3(c)(ix) of the APA only requires that the hearing on the Sale Motion be no more than twenty-five days after the Petition Date, for the reasons set forth above and others described in the Sale Procedures Motion, the Debtors have urged the Court to conduct the hearing on the Sale Motion no later than Thursday, May 27, 2010. Similarly, since the approval of the

Settlement Agreement is inextricably tied to the Sale and the Sale Motion, the Debtors request that a hearing on the Motion be held prior to or at the same time as the hearing on the Sale Motion. The parties affected by the relief requested in the Motion include most parties in interest, but principally (1) the parties to the Qui Tam Action, and (2) the Purchaser. The Debtors have lodged a proposed order granting the

Application pursuant to Form 9075-1.2. WHEREFORE, the Debtors respectfully request that the Court enter an order, (1) (2) granting the Application; setting a hearing to consider the Motion prior to or at

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the same time as the hearing on the Sale Motion; and (3) affording such further and other relief as is

appropriate under the circumstances. Dated: May 20, 2010 WESTCLIFF MEDICAL LABORATORIES, INC. -andBIOLABS, INC. /s/ Ron Bender RON BENDER JACQUELINE L. RODRIGUEZ TODD M. ARNOLD JOHN-PATRICK M. FRITZ LEVENE, NEALE, BENDER, RANKIN & BRILL L.L.P. (Proposed) Attorneys for Chapter 11 Debtors and Debtors in Possession

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 in DECLARATION OF_MATTHEW PAKKALA I, MATTHEW PAKKALA, HEREBY DECLARE AS FOLLOWS: 1. I have personal knowledge of the facts set forth below

and, if called to testify, would and could competently testify thereto. 2. I am a Managing Director of FTI Consulting, Inc.

(FTI), which maintains its main healthcare offices at 500 E. Pratt Street Suite 1400 Baltimore, MD 21202. My business office

is located at 633 West 5th Street, 16th Floor, Los Angeles, California, 90071. 3. I hold a B.A. from the University of California, San

Diego, a J.D. from Loyola Law School, and an M.B.A. from the Anderson School of Business at UCLA. I have more than 13 years

of restructuring and related advisory and management experience. My work focuses on advising distressed and underperforming

companies, their lenders, creditors and other constituencies on restructuring performance alternatives and value, and and my strategies expertise for maximizing providing

includes

financial and operational advisory with respect to

asset sales

and estate wind-downs in the healthcare, retail, manufacturing and airline industries. restructuring groups Prior to joining FTI, I worked in the of PricewaterhouseCoopers and Price

Waterhouse in Los Angeles. 4. FTI is a global business advisory firm that specializes reorganization Founded in consulting FTI has and more financial than 3,500

business

restructuring.

1982,

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professionals in most major business centers in the world, and their client list comprises many of the Global 1000, as well as a majority of the largest 25 banks and top 100 law firms in the world. FTI is designed to address the interrelated challenges

that can affect an organizations enterprise value and offers highly specialized expertise in the areas of compliance, risk, reputation, liability, performance, finance and information. In

particular, FTIs market-leading corporate finance division has advised management, senior lenders and unsecured creditors in many of the most significant restructurings and turnarounds in recent years, including Northwest Airlines, Global American Power, Home Tower

Mortgage,

Bombay

Company,

Calpine,

Automotive, Winn Dixie, Refco, Delphi, Dana Corporation, Bally Total Fitness, Circuit City, Delphi, Flying J / Big West Oil, Fremont Intermet, Tribune Investment Lehman & Loan, Gottschalks, LyondellBassell, Washington Hawaiian Telecom, Inc., WCI

Brothers, Nortel

Townsends, Mutual

Company,

Networks,

and

Communities. 5. unsecured FTI has advised in management, many of senior most lenders and

creditors

the

significant FTI and its management

restructurings and turnarounds in recent years. professionals have also recently provided

interim

services in a number of restructurings including, but not limited to, Fairfield Residential LLC Fremont Investment and Loan, Magna Entertainment, Health System, SyntaxBrillian, Methodist AaiPharma, Gary, Daughters IN, of Charity Medical

Hospital,

Quincy

10

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Center, Regional Medical Center Memphis, and Boca Raton Community Hospital. 6. Effective on or about April 1, 2010, I became the Chief

Restructuring Officer (CRO) for Westcliff Medical Laboratories, Inc. (Westcliff) and its parent corporation, and Debtors BioLabs, in Inc.

(BioLabs),

Chapter

11

Debtors

Possession

(collectively, the Debtors). 7. I make this declaration in support of the Application Unless otherwise stated,

to which this declaration is attached.

all capitalized terms herein have the same meanings as in the Application. 8. The Debtors filed their voluntary Chapter 11 bankruptcy

cases on May 19, 2010 (the Petition Date). 9. other Biolabs owns 100% of the equity of Westcliff and has no material assets. Prior to the Petition Date, the

Plaintiffs initiated a qui tam action (the Qui Tam Action) against Westcliff and other non-debtor, non-affiliated entities asserting California claims False on behalf Act. of California State of pursuant to the later

Claims

The

California

intervened into the Qui Tam Action. Action, Plaintiffs and California

By way of the Qui Tam asserted that, Westcliff

submitted false claims for payment to Medi-Cal because Westcliff (1) charged Medi-Cal more for laboratory tests than Westcliff charged to other customers for the same laboratory tests, and (2) improperly offered discounts to other customers to induce them to refer more Medi-Cal business to Westcliff. Westcliff faces

billions of dollars in potential liability in the Qui Tam Action.

11

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After the Qui Tam Action was initiated, Westcliff entered into a tolling agreement pursuant to which Westcliff was dismissed from the Qui Tam Action, without prejudice, so the parties could

attempt to reach a settlement. 10. after Before the Petition Date, on or about May 13, 2010, arms-length Plaintiffs negotiations, entered into the the Debtors, Settlement

substantial, and the

California, Agreement.

A true and correct copy of the Settlement Agreement

is attached to the Motion as Exhibit 1. 11. Also before the Petition Date, after substantial, arms-

length negotiations, the Debtors entered into an Asset Purchase Agreement (the APA) all of to effectuate Debtors its a sale assets (the to Sale) of

substantially Corporation of

the and

Laboratory Wave

America

wholly-owned

subsidiary

Newco, Inc. (Purchaser), or an overbidder.

Motions to approve

the bidding procedures and sale contemplated by the APA have already been, or soon will be, filed with the Court (the Sale Procedures Motion and the Sale Motion, respectively). The

purchase price under the APA is $57.5 million, subject to certain adjustments (the Sale Price). MTS Health Partners, LP, the

Debtors financial advisor that extensively marketed the Debtors assets pre-petition, and I believe that the purchase price

offered by Purchaser is substantially higher than the purchase price that any other buyer would be willing to pay for such assets. 12. As set forth in Section 3.1 of the APA, the purchase

price being paid by Purchaser will be adjusted downward if there

12

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is a meaningful reduction in Westcliffs post-petition business volume pending the closing of the Sale, and if that reduction gets too great and there is a material adverse change, Purchaser has the ability walk away from this transaction completely. I

believe that the risks to the Debtors estates of failing to close the Sale to Purchaser on an extremely expedited basis are therefore severe. In my opinion, there is no doubt that if the

Debtors fail to consummate their Sale to Purchaser, the Debtors will either end up selling their business for substantially less money than Purchaser has offered, or, worse, the Debtors will have to shut down their business and liquidate, which would

result in the loss of approximately 1,000 jobs and the decimation of any going concern value of the Debtors business. A

liquidation of the Debtors business would have minimal value. 13. The Settlement Agreement provides, among other things,

that, in exchange for a release of the claims in the Qui Tam Action and a dismissal of the Qui Tam Action, with prejudice, the Debtors will be required to pay California and the Plaintiffs 10% of the net sale proceeds of any Sale Transaction, which

includes any sale of a majority of the Debtors assets (the Net Sale Proceeds Payment), prior to distributing any portion of the net sale proceeds to any other creditor. The proposed Sale of

the Debtors assets to the Purchaser, or an overbidder, is a Sale Transaction within the meaning of the Settlement

Agreement. 14. The APA requires, among other things, that (1) there be

a full and final settlement by all parties to the Qui Tam Action,

13

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(2) concurrently with the closing of the Sale, the Net Sale Proceeds Payment shall be made to California and the Plaintiffs, and (3) as of the closing date of the Sale, no party to the Settlement Agreement shall have a right to void the Settlement Agreement. 15. As further discussed in the Motion, the Settlement

Agreement is an executory contract, as performance remains due to some extent by the various parties to the Settlement Agreement such that non-performance would constitute a material breach

relieving the other side from performance. Settlement Agreement and the Net Sale

The approval of the Proceeds Payment are In

essentially conditions precedent to the closing of the Sale.

an absence of the Sale, the Debtors will not be able to close the Sale to the Purchaser, more for who, the as mentioned assets above, than any offered other

substantially

Debtors

interested party.

Accordingly, in the absence of the Sale, at a

minimum, the Debtors estates would lose the value by which the Purchasers offer for the Debtors assets exceeds the value the Debtors may obtain for such assets from another purchaser, if at, all. I am informed and believe that the disparity between these is substantial. amount of Thus, the Debtors be stand made to lose a to

amounts

substantial

funds

that

could

available

satisfy claims against the Debtors estates. 16. However, in my opinion, it is more likely that a far

greater detriment would be suffered by the Debtors and their estates if the Sale to the Purchaser is not consummated. The

Debtors are unable to generate enough revenue to remain current

14

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on their debt obligations and have only been able to survive over the past seventeen months because their primary secured creditor has agreed to provide the Debtors with additional financing. Thus, if the Sale is not consummated and no other buyer can quickly be located, I believe it is likely that, in the absence of additional financing, the Debtors would be forced to

immediately shut down their business and cease operations, which would decimate the going concern value of the Debtors business to the extreme prejudice of creditors. 17. In addition to the foregoing, if the Settlement

Agreement is not assumed and consummated, Westcliff will have to continue to litigate the Qui Tam Action, which, pursuant to 11 U.S.C. 362(b)(4), is probably not subject to the automatic stay. Such litigation would come at considerable expense to the

estate, and the outcome of such litigation is not certain and may result in billions of dollars in claims against the Debtors estates. Likewise, if the Settlement Agreement is not assumed

and consummated, California may assert that it is entitled to offset and/or recoup claims against Medi-Cal receivables. 18. Based on the foregoing primary reasons, and other

reasons discussed below, I have determined, in an exercise of my business judgment, that it is in the best interests of the

Debtors and their estates to assume the Settlement Agreement. 19. While section 7.3(c)(ix) of the APA only requires that

the hearing on the Sale Motion be no more than twenty-five days after the Petition Date, for the reasons set forth above and others described in the Sale Procedures Motion, the Debtors have

15

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