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UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

In re ) Chapter 11
) Jointly Administered
XECHEM, INC., )
) Case No 08-30513
Debtor. )
) Hon. Jack B. Schmetterer

OBJECTION OF DR. RAMESH PANDEY

TO THE APPLICATION TO RETAIN BASU CAPITAL

Dr. Ramesh Pandey, a party in interest in the captioned cases, hereby objects to the

Application of the Official Committee of Unsecured Creditors of Xechem, Inc., et al., to Retain

and Employ Basu Capital LLC as Capital Finder (the “Application”) as follows:

INTRODUCTION

Basu Capital should not be retained as a professional in these cases. Basu Capital does

not satisfy the statutory requirements of Section 327(a) because it is a creditor in these cases and

has not agreed to unconditionally waive its prepetition claim against the estates.

Even if Basu Capital waives its prepetition claim, it is questionable whether Basu Capital

can even meet the statutory requirements of Section 327(a) given its connections with certain

undisclosed creditors and bondholders, as well as Robert Swift, an insider charged with, among

other things, breaching his fiduciary duties to the Debtors. At the very minimum, Basu Capital

should be required to make further disclosures before it is retained as a professional in these

cases.

Finally, the information provided in the Application raises questions about whether Basu

Capital already has investors lined up and whether Basu Capital actually hopes to acquire a

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substantial interest in the reorganized Xechem. Answers to these questions are material to

determining whether Basu Capital should be retained as a professional and compensated as a

professional. In other words, additional information is needed to determine whether the

Application merely represents a vehicle to transfer value to Basu Capital for past efforts (e.g., as

a means to indirectly pay its claim) or instead represents an effort to provide Basu Capital an

economic incentive to identify and obtain as yet unknown sources of capital.

THE FACTS

Shekhar Basu is the President of Basu Capital, a New York limited liability company.

On information and belief, Mr. Basu is also the owner of Basu Capital and fully controls Basu

Capital. Therefore there is no material distinction between Mr. Basu and Basu Capital for

purposes of the Application.

Mr. Basu filed a proof of claim against the Xechem International estate for $262,800, in

which he alleges:

Commencing in July of 2007, upon the instructions of Robert

Swift, COO of the Debtor, Claimant accepted the assignment to
travel to India to conduct an investigation concerning the
operations of Xechem (India) PVT, Ltd., to determine the current
status of the business, what was required and to potentially shut
down operations or make other recommendations. . . .With the
authority of the Board of Directors and management, I began
searching for and interviewing appropriate local Indian law firms
and ultimately recommended an Indian law firm that was highly
recommended to me. This required also daily supervision,
conference calls between the law firms in India and the Company’s
Board of Directors. During the course of my investigation, I
uncovered the fact that the Company’s alleged 67 percent
ownership of the alleged Indian subsidiary was not registered
according to Indian law creating a major problem. I also
uncovered the fact that funds and equipment may have been
diverted from their intended use.

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As part of this investigation, I was also in constant contact with

attorneys in Chicago in coordinating their activities with the Indian
lawyer. Upon facts uncovered by me, the Company had me
engage attorneys on behalf of the Company. The suit was filed in
September 2007 and I attended, at the instructions of the
Company’s COO, hearings at the Indian High Court in New Delhi.

In fact, Mr. Basu and Basu Capital were not retained by Xechem International to travel to

India on behalf of the company and the Board of Directors did not sanction Mr. Basu’s actions in

this regard. Mr. Basu traveled to India to further his own interests, and he was interfering in the

management of the company. This is why Mr. Basu and Basu Capital were not compensated in

connection with Mr. Basu’s activities in India.

To the extent Mr. Basu was taking directions from anyone at the company, it was Robert

Swift. Mr. Swift, however, has been charged by the Committee with self dealing in violation of

his duties to the Debtors. As a result of Mr. Swift’s actions, the Committee sought and was

granted derivative standing to pursue legal action against Mr. Swift and those acting in concert

with him.

THE APPLICATON

In the Application, Basu Capital seeks to be retained on a contingency basis with Basu

Capital to be paid 10% of aggregate gross proceeds raised from new investors (“New Investors”)

introduced to the Debtor by Basu Capital and 5% of any investments by an existing stockholder

or creditor of the debtors or their affiliates (“Current Investors”). With regard to Current

Investors, it is proposed that Basu Capital receive the 5% commission even if it has absolutely

nothing to do with the Current Investor’s decision to invest in reorganized Xechem. In addition,

if Basu Capital raises in excess of $2 million, it will be entitled to five-year warrants to purchase

a substantial amount of shares in the reorganized Xechem based upon the “pre-money valuation”

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of the Debtors and the amount of capital raised from New and Current Investors. See

Application at ¶ 15. Although it is difficult to value the warrants, there is nothing in the

Application explaining why Basu Capital is entitled to compensation in addition to the already

generous 10% on capital raised from New Investors.

Although not discussed in the Application, the retention agreement also proposes that

Basu Capital will have a right of first refusal for the 24 months period following expiration of the

term of its retention to act as the finder in connection with any subsequent financings of Xechem

International with the right to introduce investors to the company providing up to 50% of the

funds raised in the subsequent financing on the same terms of compensation. Again, the

Application does not even attempt to explain how the benefits to be provided by Basu Capital

justify these terms. Instead, this proposed provision of the retention appears to be a method for

Basu Capital and the interests it represents to maintain control of the Debtors.

In addition, Mr. Basu and Basu Capital do not propose to unconditionally waive the Basu

Claim as part of the retention. Instead, they propose to waive the Basu Claim only on the

condition that Basu Capital raises a minimum of $2 million for the debtors and Basu Capital is

compensated in connection with the retention. Id. at ¶ 19. While it may not be likely, it is at

least possible that Basu Capital will be compensated in this case under the terms of its proposed

retention without waiving the Basu Claim.

Mr. Basu also discloses that “several” of Basu Capital’s clients hold the debtors’ bonds

and are creditors in these cases, but he does not disclose any information about these clients,

including for example what percentage of Basu Capital’s business these clients account for or

whether any of these clients have interests that are materially adverse to the debtors beyond their

creditor status. On information and belief, Basu Capital represents all of, or at least a large

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majority of, the Debtors’ bondholders, and Basu Capital may already have an agreement with

some of its creditor and bondholders clients to invest in the reorganized Xechem.

It is also notable that Basu Capital failed to disclose its relationship with Mr. Swift to the

Court, which relationship predates their involvement with the Debtors. Basu Capital’s

prepetition fund raising efforts on behalf of the Debtors were in conjunction with Mr. Swift, and

Mr. Swift gained his position with the Debtors as a result of the control Basu Capital’s clients

were able to exert over the Debtors as a result of their investment in the Debtors. See Form 8-K,

dated May 3, 2007 (Exhibit 1).

LEGAL DISCUSSION

I. BASU CAPITAL DOES NOT MEET THE REQUIREMENTS OF SECTION

327(a).

Section 327(a) of the Bankruptcy Code provides, in part, that:

Except as otherwise provided in this section, the trustee, with the

court’s approval, may employ one or more attorneys . . . or other
professional persons, that do not hold or represent an interest
adverse to the estate and that are disinterested persons, to represent
or assist the trustee in carrying out the trustee’s duties under this
title.

11 U.S.C. § 327(a). Thus, in order to be retained, a professional such as Basu Capital (1) must

not hold an interest adverse to the bankruptcy estate, (2) must not represent an interest adverse to

the estate, and (3) must be disinterested.

Satisfaction of these criteria is not just a guidepost to determining when employment may

be authorized, it is an inalterable prerequisite to employment. See, e.g., Tri-State Leasing Corp.

v. United States Tr. (In re Coal River Res., Inc.), 321 B.R. 184, 187 (W.D. Va. 2005) (noting that

Congress expressly limited bankruptcy courts’ discretion to authorize retention of counsel

through requirements of section 327 of Bankruptcy Code); Harold & Williams Dev. Co. v.

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United States Trustee (In re Harold & Williams Dev. Co.), 977 F.2d 906, 909 (4th Cir.

1992) (“These are congressionally established per se rules that a bankruptcy court must apply in

exercising its approval power over the appointment of professionals.”).

The Bankruptcy Code includes as a “disinterested person,” someone who “is not a

creditor, an equity security holder, or any insider” and someone who “does not have an interest

materially adverse to the interest of the estate or of any class of creditors or equity security

holders, by reason of any direct or indirect relationship to, connection with, or interest in, the

debtor . . . or for any other reason.” 11 U.S.C. § 101(14). Basu Capital is not disinterested

because the Basu Claim has not been unconditionally waived and Basu Capital is a creditor in

these cases.

Basu Capital will undoubtedly argue that the Basu Claim belongs to Mr. Basu personally,

not Basu Capital, and therefore Basu Capital is not a creditor. Mr. Basu and Basu Capital,

however, cannot avoid the fact that they are disinterested in this case by employing a shell game

of this nature. The Debtors’ prepetition relationship was with Basu Capital and to the extent the

Debtors owe any money for work performed by Mr. Basu on a prepetition basis, it would be

solely in his capacity as the owner and President of Basu Capital. The Application recognizes as

much when it asserts that Basu Capital – not Mr. Basu in his individual capacity – traveled to

India on behalf of the debtors to investigate the debtors’ Indian operations, and rendered various

services to the debtors. See Application at ¶ 9.

Moreover, even though Mr. Basu and Basu Capital are willing to conditionally waive the

Basu Claim, it does not alter the fact that Basu Capital is presently a creditor in the case, that it is

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engaged in litigation with the Debtors over that claim, 1 and that its status as a disputed creditor

will not change during its representation of the estates because the proposed conditional waiver

takes effect only once Basu Capital is compensated in connection with its retention. As noted

above, the requirements of Section 327(a) are absolute and cannot be waived or modified, even

on equitable grounds pursuant to the Court’s authority under Section 105(a). In Re Milwaukee

Engraving Co., Inc., 219 F. 3d 635, 637 (7th Cir. 2000) (“Although the bankruptcy judge

believed that applying the Code literally would be inequitable, ‘[b]ankruptcy courts are not

authorized in the name of equity to make wholesale substitution of underlying law . . . but are

limited to what the Bankruptcy Code itself provides’“) (citation omitted); In re Tinley Park

Associates, L.P., 142 B.R. 272, 280 (N.D. Ill. 1992) (“Both § 327(a) and Bankruptcy Rule §

2014(a) require strict enforcement to preserve the integrity of the bankruptcy system”); see also

U.S. Trustee v. Price Waterhouse, 19 F.3d 138 (3rd Cir. 1994) (rejecting argument that courts

may apply a “flexible approach” in determining whether a professional who is disinterested may

nevertheless be retained under Section 327(a) and holding that debtor could not employ as

accountant and financial advisor the accounting firm that had performed prepetition services for

debtor and for which debtor owed over $ 800,000); Childress v. Middleton Arms, L.P. (In re

Middleton Arms, L.P), 934 F.2d 723, 725 (6th Cir. 1991) (holding that bankruptcy court’s

equitable powers “cannot be used to circumvent the clear directive of section 327(a)” that

retained professionals be disinterested); In re Weibel, Inc., 161 B.R. 479, 483 (Bankr. N.D. Cal.

1993) (recognizing that § 327(a) should be strictly applied, even where doing so sacrifices

alleged efficiencies, “in order to maintain the ‘appearance of propriety’ and ‘to ensure the

1
The Debtor filed an objection to the Basu Claim and Mr. Basu subsequently filed a motion for
leave to file an adversary complaint relating to the Basu Claim. The claim objection and related
adversary proceeding are still pending.

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integrity of the bankruptcy process’“); In re BBQ Resources, Inc., 237 B.R. 641 (Bankr. E.D. Ky.

1999) (“. . . bankruptcy courts cannot use equitable principles when the statutory language is

unambiguous”); In re Ginco, Inc., 105 B.R. 620 (D. Colo. 1988) (Section 327(a) standard “is a

strict one, ‘broad enough to include anyone who in the slightest degree might have some interest

or relationship that would color the independent and impartial attitude required by the Code’“)

(citation omitted).

In addition, Basu Capital has substantial prepetition relationships with the Debtors, the

Debtors’ bondholders and creditors, and Mr. Swift. These relationships at the very least require

additional disclosures and investigations by the Creditors’ Committee before Basu Capital is

retained in these cases under Section 327(a). 2 For example, if Mr. Basu had any involvement

with Mr. Swift’s wrongdoing, it certainly cannot serve as a professional in these cases.

In addition, Basu Capital’s relationship with bondholders and creditors and the proposed

compensation structure, which provides Basu Capital with five-year warrants and the potential to

become a substantial stockholder in the reorganized Xechem, raises a serious question regarding

exactly what Basu Capital is doing for the Debtors’ estates and whether it deserves to be

compensated in the amounts proposed or at all. If Basu Capital and its clients are already willing

to invest in reorganized Xechem, there does not appear to be any reason for the estates to

compensate Basu Capital under a formal retention arrangement. The purpose of retaining and

compensating a “capital finder” is to identify new sources of capital, not to facilitate Basu

Capital’s investment in the reorganized Xechem.

2
For example, under Section 327(c), a person is not disqualified for employment under solely
because of such person’s employment by or representation of a creditor, but that person may not,
while employed by the estate, represent a creditor in connection with the case. Certainly, if Basu
Capital’s existing clients will be investing in the reorganized debtor, Basu Capital will be
representing those clients in connection with the case in violation of Section 327(c).
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II. THE PROPOSED COMPENSATION IS NOT REASONABLE.

Even if the Court finds that Basu Capital meets the requirements of Section 327(a), the

proposed compensation is not reasonable. First, Basu Capital should not be compensated in

connection with any investment made by parties that it does not specifically bring to the table,

including Current Investors.

Second, at the very least, there needs to be some explanation of why the warrants and

right of first refusal – two unusual forms of compensation for a capital finder – are justified in

this case. Without some meaningful explanation, there is no reason for the Court to approve

compensation in excess of the 10% commission provided in connection with investments by

New Investors.

III. BASU CAPITAL SHOULD NOT BE RETAINED IF THE COMPETING PLAN

PROPOSED BY MR. FORTHUN CAN BE CONFIRMED.

Finally, given that Mr. Forthun has obtained a $2 million commitment to fund his

proposed plan of reorganization (see Exhibit 2) and there is no cost to the estates for this

investment, the viability of Mr. Forthun’s plan should be tested before the Creditors Committee

proceeds with its proposed plan and the retention of Basu Capital.

CONCLUSION

WHEREFORE, for the reasons stated herein, Dr. Pandey respectfully requests that the

Court deny the Application and grant Dr. Pandey such further relief as the Court deems

appropriate under the circumstances.

Dated: October 29, 2009 Respectfully Submitted,

DR. RAMESH PANDEY

By: /s/ Sara E. Lorber

One of His Attorneys

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William J. Factor (6205675)

Sara E. Lorber (6229740)
THE LAW OFFICE OF
WILLIAM J. FACTOR, LTD.
1363 Shermer Road, Suite 224
Northbrook, IL 60062
Telephone: (847) 239-7248
Facsimile: (847) 574-8233
Email: wfactor@wfactorlaw.com
Email: slorber@wfactorlaw.com

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CERTIFICATE OF SERVICE

I, Sara E. Lorber, an attorney, hereby certify that, on October 29, 2009, pursuant to

Section II, B, 4 of the Administrative Procedures for the Case Management/Electronic Case

Filing System and Fed.R.Civ.P. 5(a), I caused a copy of the foregoing document to be served

electronically through the Court’s Electronic Notice for Registrants on all persons identified as

Registrants on the appended Service List.

/s/ Sara E. Lorber

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SERVICE LIST

Registrants in the Case

(Service through ECF)

Kara J. Bruce kbruce@lockelord.com, docket@lockelord.com

Sonia U. Chae chaes@sec.gov

Douglas S. Draper ddraper@hellerdraper.com, lcollins@hellerdraper.com,

mdolan@hellerdraper.com

Deborah W. Fallis dfallis@hellerdraper.com, lbush@hellerdraper.com

B. Lane Hasler lanehasler@blhpc.com

Steve Jakubowski sjakubowski@colemanlawfirm.com

Edward J. Lesniak elesniak@burkelaw.com

Monika J. Machen mmachen@sonnenschein.com

William T. Neary USTPRegion11.ES.ECF@usdoj.gov

Robert E. Richards rrichards@sonnenschein.com

Elizabeth E. Richert erichert@colemanlawfirm.com, johnson@colemanlawfirm.com

Christopher R. Thompson cthompson@mwe.com

Elliot Wiczer ewiczer@wiczerzelmar.com

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