CANOPY FINANCIAL, INC., ) Case No

Case 09-44943 Doc 10 Filed 11/27/09 Entered 11/27/09 13:40:57 Desc Main Document Page 1 of 24 IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION In re: ) Chapter 11 ) CANOPY FINANCIAL, INC., ) Case No. 09-44943 ) Debtor. ) Hon. Eugene R. Wedoff APPLICATION OF DEBTOR AND DEBTOR-IN-POSSESSION FOR ORDER AUTHORIZING EMPLOYMENT AND RETENTION OF JENNER & BLOCK LLP AS ATTORNEYS FOR DEBTOR PURSUANT TO SECTION 327(A) OF THE BANKRUPTCY CODE AND RULE 2014 OF THE FEDERAL RULES OF BANKRUPTCY PROCEDURE Canopy Financial, Inc., the above captioned debtor and debtor-in-possession (“Canopy” or the “Debtor”), hereby applies (the “Application”) for entry of an order, substantially in the form attached hereto as Exhibit A, under sections 327(a), 329, and 331 of title 11 of the United States Code (the “Bankruptcy Code”) and Rules 2014 and 2016 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) authorizing the Debtor’s retention and employment of Jenner & Block LLP (“Jenner & Block”), nunc pro tunc to the Petition Date (defined below) as the Debtor’s bankruptcy counsel. In further support of this Application, the Debtor relies on the Declaration of Vincent E. Lazar in Support of the Application of Debtor and Debtor in Possession for Order Authorizing Employment and Retention of Jenner & Block LLP as Attorneys for Debtor Pursuant to Section 327(a) of the Bankruptcy Code and Rule 2014 of the Federal Rules of Bankruptcy Procedure (the “Lazar Declaration”), which is submitted concurrently with the Application. In support of this Application, the Debtor respectfully represents as follows: Jurisdiction 1. This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2). Case 09-44943 Doc 10 Filed 11/27/09 Entered 11/27/09 13:40:57 Desc Main Document Page 2 of 24 2. Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409. 3. The statutory predicates for the relief sought herein are sections 327(a), 329, and 331 of the Bankruptcy Code and Rules 2014 and 2016 of the Bankruptcy Rules. Background 4. On November 25, 2009 (the “Petition Date”), the Debtor commenced this case by filing a voluntary petition for relief under chapter 11 of the Bankruptcy Code. No creditors’ committee has yet been appointed in this case by the United States Trustee. 5. As of the Petition Date, the Debtor operated as a provider of health insurance- related online banking interfaces and processing services, supporting thousands of consumer- driven healthcare accounts and processing thousands of healthcare related payments annually. The Debtor’s flagship products, HealthDirect® and CareGain®, are among the leading technology-enabled electronic payment, account management, and investment technology platforms for health savings accounts, flexible spending accounts, and health reimbursement arrangements. The Debtor’s products incorporate plan design, expense tracking, integrated investment trading, online bill payment, ACH processing, card management systems, account management, customer service interfaces, and plan advisory capabilities -- all specifically for healthcare. The Debtor maintains physical offices in Chicago, Illinois; San Francisco, California; and Plainsboro, New Jersey. 6. On October 31, 2007, the Debtor entered into a Loan and Security Agreement (the “2007 Loan Agreement”) with Venture Lending & Leasing IV, Inc. and Venture Lending & Leasing V, Inc. (collectively, the “Prepetition Lenders”) and on May 28, 2009, the Debtor entered into a Loan and Security Agreement (together with the 2007 Loan Agreement, the “Loan Agreements”) with Venture Lending & Leasing V, Inc. Pursuant to the Loan Agreements, the 2 Case 09-44943 Doc 10 Filed 11/27/09 Entered 11/27/09 13:40:57 Desc Main Document Page 3 of 24 Prepetition Lenders agreed to make periodic term loans to the Debtor. As collateral for the loans, among other personal property and assets, the Debtor granted the Prepetition Lenders a security interest in certain of the Debtor’s bank accounts (collectively, the “Pledged Accounts”). The Debtor, the Prepetition Lenders, and the banks also executed Account Control Agreements. Pursuant to the Loan Agreements and the Account Control Agreements, upon the occurrence of certain events, the Prepetition Lenders are authorized, upon proper notice, to exercise exclusive control over the Pledged Accounts. 7. On July 15, 2009 and August 19, 2009, the Debtor raised an aggregate of $74,999,995.65 by issuing Series D Preferred Stock to entities affiliated with a group of private equity investors. Of that amount, $39,321,230.77 was used by the Debtor to repurchase shares of its Common Stock, Series A Preferred Stock and Series B Preferred Stock from certain existing stockholders of the Debtor, and the remaining funds were intended to be used by the Debtor for working capital and general corporate purposes. 8. Earlier this month, the Debtor discovered that financial statements provided to, inter alia, its investors and the Prepetition Lenders were fraudulent, and also uncovered other significant financial and accounting irregularities. Upon this discovery, the Debtor’s board of directors formed a special committee of outside directors who, along with independent legal counsel and forensic accountants, have been conducting an investigation into this matter. The two officers of the Debtor implicated in the fraud were removed from management and placed on unpaid leave (one subsequently resigned and the other’s employment was terminated by the Debtor), and they have had no involvement or participation in the Debtor’s business since that time. The special committee also notified the appropriate authorities, and the Debtor has been fully cooperating with them. 3 Case 09-44943 Doc 10 Filed 11/27/09 Entered 11/27/09 13:40:57 Desc Main Document Page 4 of 24 9. The Debtor has notified the Prepetition Lenders and certain of its customers that it believes that the inaccuracy of financial statements and other significant financial and accounting irregularities constituted a material adverse change under the Loan Agreements and certain customer agreements. In response to this notice, on November 17, 2009, the Prepetition Lenders, purporting to act pursuant to an Account Control Agreement, exercised control over one of the Debtor’s bank accounts that was a Pledged Account and transferred to themselves from that account $5,472,812.61, the then-outstanding indebtedness to the Prepetition Lenders. The Debtor also has received termination notices from certain of its customers. 10. On November 19, 2009, the Debtor reduced the number of its employees from 123 full-time employees to 31 full-time employees, and has also taken other measures to preserve its remaining assets and business. 11. The Debtor’s board of directors has determined that a bankruptcy filing is necessary to preserve the value of the Debtor’s business and assets so that it can explore a restructuring, sale or other business alternatives. In the interim, the Debtor continues to operate its business and to service all of its customers’ accounts. Relief Requested 12. By this Application, the Debtor seeks to employ and retain Jenner & Block as of the Petition Date to represent the Debtor as its bankruptcy counsel in connection with the Debtor’s chapter 11 case. Accordingly, the Debtor respectfully requests entry of an order under sections 327(a), 329, and 331 of the Bankruptcy Code, in substantially the form attached hereto as Exhibit A, authorizing the Debtor to employ and retain Jenner & Block as its attorney to perform the legal services that will be necessary during its chapter 11 case, as summarized herein. 4 Case 09-44943 Doc 10 Filed 11/27/09 Entered 11/27/09 13:40:57 Desc Main Document Page 5 of 24 Basis for Relief 13. The Debtor requires Jenner & Block to act as its counsel for insolvency and related matters, and to render legal services relating to the day-to-day administration of this chapter 11 case and the myriad of issues that may arise in this case, including, without limitation, the following services: (a) advising the Debtor of its powers and duties as Debtor in possession; (b) advising the Debtor regarding matters of bankruptcy law; (c) representing the Debtor in proceedings and hearings in the United States District and Bankruptcy Courts for the Northern District of Illinois; (d) preparing on behalf of the Debtor any necessary motions, applications, orders, and other legal papers; (e) providing assistance, advice, and representation concerning any possible sale of the Debtor’s assets; (f) providing assistance, advice, and representation concerning the confirmation of any proposed plan(s) and solicitation of any acceptances or responding to objections to such plan(s); (g) providing assistance, advice and representation concerning any further investigation of the assets, liabilities, and financial condition of the Debtor that may be required under local, state, or federal law; (h) prosecuting and defending litigation matters and such other matters that might arise during this chapter 11 case; (i) providing counseling and representation with respect to assumption or rejection of executory contracts and leases, sales of assets, and other bankruptcy-related matters arising from this case; (j) rendering advice with respect to general corporate and litigation issues relating to this case, including, but not limited to, securities, corporate finance, tax, and commercial matters; and (k) performing such other legal services as may be necessary and appropriate for the efficient and economical administration of this chapter 11 case. 5 Case 09-44943 Doc 10 Filed 11/27/09 Entered 11/27/09 13:40:57 Desc Main Document Page 6 of 24 It is necessary and essential that the Debtor, as a debtor-in-possession, employ Jenner & Block to render the foregoing professional services.

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