As part of the ABS holders' planned settlement with National Century Financial Enterprises, ING will likely refund a $43.1 million principal payment it received from NPF VI in November 2002, which is being called a "preferential transfer" by the debtors in possession of the bankrupt estate.

The debtors are also targeting a $75 million principal payment to Credit Suisse First Boston in September 2002 from the NPF XII trust.

Interestingly, one of the biggest hurdles in the bankruptcy proceedings is establishing an agreement between the two trusts, NPF VI and NPF XII. According to court documents, the perpetual transfer of cash reserves between the two vehicles during the heyday by the trustees (at the instruction of former NCFE management) has made it difficult to determine which, or, rather how much claim each trust had against the reserve accounts when NCFE collapsed.

When the music stopped, most of the money was in NPF VI, the smaller of the two trusts. It was a crapshoot, however, as the cash could have been in either trust any given day, according to court documents, which has made the settlement between the two trust subcommittees a complicated ordeal.

JPMorgan Chase and Bank One were the trustees on NPF VI and NPF XII, respectively.

In September 2003, NCFE, now an entity run by the debtors for the purpose of dissolving its assets and settling its claims, submitted the above-mentioned "Joint Plan of Liquidation," the most recent amendment of which is dated Nov. 3. The Bankruptcy Court, Southern District of Ohio, will consider approving the motion on Dec. 18, though the debtors are asking to postpone that date to the first quarter 2004, as they plan to further amend the current plan. The extension would allow the debtors to continue soliciting acceptance from others parties involved in the liquidation.

The plan has run into controversy from other parties to the bankruptcy. CSFB, for one, has objected to the plan, alleging the subcommittee for NPF XII did not approve the agreement.

In the Joint Plan, the senior bank lenders will have the option to be reimbursed by the existing cash from liquidated assets or to receive a modified interest in the company, while the subordinated debtors may suffer losses to varying extents. The securitization noteholders, meanwhile, would receive their agreed-upon portions of the funds in the reserve account. Further, a separate Liquidation Trust would be established to absorb whatever is left of the company, plus all future settled claims, including disputed accounts receivables and other assets recovered. NPF VI and NPF XII noteholders would receive beneficial interests in this trust.

Several provider groups, particularly the ones owned in part by NCFE, oppose this plan, and argue that the financings provided by NCFE should be reclassified as equity investments, and thus would not be reclaimable by any of the NCFE debtors. Additionally, these groups have filed countersuits against NCFE for the damage the company caused.

Also opposing the Joint Plan are the actual equity holders of NCFE, who would be wiped out entirely. For example, shareholder Rebecca Parrett's counsel has urged the court to reject the plan.

Meanwhile, former NCFE President Lance Poulsen - who re-elected himself chairman of the board of NCFE in 2003 - has submitted a motion to the court to end the "period of exclusivity" under which the debtors' plan for liquidation is being reviewed, objected to and agreed upon.

Poulsen further proposes bypassing the debtors' plan entirely, in an attempt to assume control of the liquidation. In his plan, the assets and subsidiaries of NCFE, including those of its subsidiaries, should be liquidated to pay off it debts, with the remaining accumulation paid to NCFE founders and shareholders. Poulsen proposes that his equity stake, and the shares of co-founders Parrett and Don Ayers, be escrowed until claims against them by NPF VI and NPF XII are settled. This plan seems to entirely disregard the two securitization trusts as having claim to any assets in the NCFE liquidation.

"The Board should not be permitted to interfere with this process by filing a plan that would disregard billions of dollars of claims," write attorneys at Jones Day, which is representing NCFE, in a court document submitted last week.

Just prior to the company's bankruptcy, workout specialist Alvarez & Marsal was retained by NCFE to manage the debtors' operations. As such, an Alvarez employee, David Coles, was appointed CEO of NCFE in November 2002. No longer CEO, Coles remains a senior officer of NCFE, and thus deemed the Joint Plan a fair resolution.

When NCFE collapsed in October 2002, there was roughly $3 billion in principal outstanding associated with NPF VI ($880 million) and NPF XII ($2 billion). In September 2002, NCFE represented that the receivables backing these trusts amounted to $3.8 billion.

According to court documents, the actual dollar value of collection and purchase accounts were $11 million and $43 million, respectively, for NPF VI and NPF XII, when NCFE filed for bankruptcy. The cash in the reserve account for NPF VI was $125 million, while NPF XII had just $10 million.

As of Aug. 1, the NPF VI reserve account held $139.1 million, and the NPF XII reserve account held $73.9 million. The plan, if approved, provides for the initial distribution to the two trusts of the negotiated reserve account holdings (see chart). According to the court documents, class A noteholders from the securitizations would receive pro rata shares of whatever passes through initially, and a pro rata share of the future cash coming off the Liquidating Trust. The class B noteholders in the securitizations would only receive distributions if the class A noteholders receive payment in full.

Endless hurdles

The failure of NCFE is testing the market at several levels, and the bankruptcy proceedings will likely establish at least a few precedents. Many of the healthcare providers that relied on NCFE have challenged the true sale of the receivables that the securitization trusts lay claim to. Historically, the argument has been made that securitization is really secured financings and not true sales. As mentioned above, some of the borrowers who sold receivables to the trusts are arguing that these should be considered equity financings, given the circumstances.

As for true sale, the bankruptcy court will consider the resolution of a particular case representing $600 million in claims against a group of providers, collectively referred to as DCHC (Doctors Community Healthcare Corp.). DCHC filed for bankruptcy two days after NCFE, and is currently liquidating its assets for the benefit of its debtors. DCHC has countered that NCFE owes it $300 million, based on breaches of contract and other alleged misdoings.

Shortly after the bankruptcy, a judge granted a temporary restraining order against the providers who, in attempts to remain solvent, were diverting purchased receivables from the trusts, though the debtors contend that many providers continued diverting the receivables. Meanwhile, Med Diversified sought a temporary restraining order "to allow it to instruct payors to remit payment to Med Diversified rather than to the debtors on the accounts receivable that it had sold to the Debtor," court documents submitted by Jones Day stated. The court denied this motion.

Currently, there is a "standstill litigation agreement" between NCFE debtors and DCHC, though the parties continue to negotiate. The resolution of this dispute will determine the outcome of similar cases. Depositions are due in April 2004. NCFE owned a significant stake in DCHC.

Seemingly endless litigation among providers, non-providers and other parties continues. For example, the debtors are currently in litigation with Amedisys regarding $7.3 million in accounts receivable that Amedisys claims it never received payment for. In April, the bankruptcy court ordered the lockbox payments associated with the company be released to Amedisys.

Law firm Gibbs & Bruns represents the bondholders of NPF XII and NPF VI, as well as the debtor (NCFE), and is counsel for third-party unresolved claims, including the healthcare providers, and individuals, such as the former management of NCFE. G&B is not permitted to be counsel on the pending claims against CSFB and ING, and is subject to other limitations, such as bondholder versus bondholder complaints.

ING funded about $500 million in NCFE investments out of its Mont Blanc ABCP conduit last year. CSFB, meanwhile, took a significant write-down to $44 million from an initial $258 million associated with its positions in NCFE. Ambac and other companies with stakes in the NCFE securitizations have also announced losses. CSFB and ING both took part in underwriting NCFE securitizations.

Poulsen's stand

Since Poulsen's resignation as chairman of the board and president of NCFE on Nov. 8, 2002, there has been a back-and-forth as to Poulsen's rights and affiliation with NCFE as a shareholder, and his involvement in the restructuring. In a court document dated Jan. 9, 2003, the debtors filed a motion to reject insurance coverage and other rights to several of the former board of directors, including Poulsen's wife, who had resigned with Poulsen in 2002. In a hearing before the bankruptcy court, Poulsen alleged that on Nov. 8, 2002, he had entered into agreements with the debtors to provide consulting services, and that he was entitled to ongoing fees. The debtors, some of whom attended the Nov. 8, 2002 board meeting, allege that no such agreement was established. The debtors filed a motion on March 7, 2003 to reject any further alleged back-due consulting fees to Poulsen, which was granted by the court. On Sept. 29, the debtors subsequently rejected Poulsen's request for fees.

Additionally, in March of this year, Poulsen requested that Alvarez & Marsal allow NCFE to hold its annual shareholders meeting, demanding that if no such meeting was scheduled, a special meeting for shareholders should be scheduled on April 7. The debtors submitted a motion to grant A&M exclusive powers as debtor in possession of NCFE, and to not honor the shareholder meeting. The bankruptcy court denied the motion, and on May 16, the shareholders held their annual board meeting, electing six members to the board, including Poulsen, his wife Barbara Poulsen, Donald Ayers, Raymond Brooks, Thomas Mendell and Harold Pote. Pote stepped down two weeks later, followed by Brooks in early July. According to court documents, currently Poulsen, Mrs. Poulsen and Donald Ayers make up the board of directors of NCFE.

In late August, Poulsen submitted another complaint against the debtors, seeking to reclaim $17 million seized by the debtor from a retirement fund established by Poulsen in 1995. In July 2002, NCFE - then headed by Poulsen - raised the $17 million in cash through the sale of preferred stock.

"[The] funds were placed in a segregated account with Huntington National Bank to be maintained by the Debtor corporation solely for the benefit of the Plaintiff and other key employees," Poulsen's counsel, Wilkens, Frohlich, Jones, Hevia, Russell & Sutter, states in the complaint.

Proposed plan (11/4):

effective date distributionS

* NPF VI receives funds in reserve account (estimated at $139.1 million)

* NPF VI receives returned principal payment from ING in the amount of $43.12 million

* NPF VI transfers $72.8 million to NPF XII as proposed in the Settlement of Intercompany Claims

* NPF VI receives the proceeds of settlement with

borrower Medshares currently in Escrow

* NPF VI receives its proportional share of proceeds (including collections) paid through the Liquidation Trust after closing date.

* NPF XII receives funds in reserve account as of Aug 1, which amounts to $73.9 million.

* NPF XII receives transfer of $72.8 million from NPF VI

* NPF XII is the sole beneficiary of the claims against CSFB regarding the principal payment received by CSFB at $75 million.

* NPF XII receives its proportional share of proceeds (including collections) paid through the Liquidation Trust after closing date.

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