10/02/2007 255 Objection Filed by Plasticon International, Inc. (RE: related document(s)156 Motion to Appoint Trustee,, filed by U.S. Trustee U.S. Trustee, 167 Motion to Appoint Trustee filed by Creditor Pro Plas LLC). (Kennedy, Ellen) (Entered: 10/02/2007)
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Doc 255
IN RE:
PLASTICON INTERNATIONAL, INC.
Debtor.
Case No. 07-50934
Judge William S. Howard
Chapter 11
OBJECTION TO MOTION OF U.S. TRUSTEE AND MOTION OF MURPHY ENTITIES TO APPOINT A CHAPTER 11 TRUSTEE
The Debtor and Debtor-in-Possession, Plasticon International, Inc. (“Plasticon”) (the “Debtor”), pursuant to 11 U.S.C. §§ 327 and 329, and Fed. R. Bk. P. 2014(a), in response to the Motions of U.S. Trustee and the Murphy Entities to Appoint a Chapter 11 Trustee (the “Motion(s) to Appoint”) respectfully tenders the following objection and Memorandum of Law:
Background
1. On May 16, 2007, Plasticon filed its voluntary petition under Chapter 11 of title 11 of the United States Code (“Bankruptcy Code”) in the United States Bankruptcy Court for the Eastern District of Kentucky, at Lexington.
2. Pursuant to 11 U.S.C. §§ 1107(a) and 1108, the Debtor continues in possession and control of its assets and management of its business.
3. On August 9, 2007, the U. S. Trustee filed his Motion to Appoint a Chapter 11 Trustee (D.E. 156)(the “Motion to Appoint”), the basis of which is the U.S. Trustee’s concerns relating to the management of the Debtor.
4. On August 16, 2007, the Murphy Entities filed a similar motion (D.E. 167).
5. This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. The Motions to Appoint are core proceedings pursuant to 28 U.S.C. § 157(b)(2).
6. Having participated in discovery and reviewed both the U.S. Trustee’s documents and arguments as well as those of the Murphy Entities, it is apparent to the Debtor that grounds for the Motions to Appoint center on issues surrounding the actions and management of the president and designated corporate representative, James N. Turek, Sr. (“Turek”), in this case and its sister case, In Re Pro Mold, Inc., Case No. 07-50935.
7. Turek, acting in his capacity as president and corporate representative of the Debtor, has followed advice of counsel to remove himself from the operations of the Debtor. The Debtor has filed an application (“Application”) with the Court to employ a chief restructuring officer (“CRO”) to assume the duties in managing this Debtor and taking the Debtor through the Chapter 11 process. Per his Affidavit filed September 26, 2007, Turek stated “due to increasing responsibilities that have been placed on me, I have, on behalf of the Debtor, determined that I will step aside in my capacity as president and corporate representative of the Debtor.” Turek Aff. ¶ 4 [D.E. 233] “Further, I understand that on employment of a chief restructuring officer, I will not participate further in the management of the Debtor which includes as the designated corporate representative managing the finances of the Debtor and its subsidiaries, signing checks, or publically representing the Debtor or its subsidiaries.” Turek Aff. ¶ 10 [D.E. 233] Debtor’s Application was filed on September 28, 2007 (DE #237). A Supplement to the Application (the “Supplement”) further enumerating the duties of the CRO was filed in this case on October 2, 2007 [D.E. 254] [1].
[1] Based on the questions of the Court and the concerns raised by the U.S. Trustee and the Murphy Entities, the
Debtor submitted the Supplement to further detail the rights and duties of the CRO.
8. Per the Application, Debtor proposes to employ Arcadia Consulting Services to provide William D. Bishop as its CRO. Bishop has agreed to serve in this role, and Debtor refers the Court to his affidavit filed with the Application for his qualifications and statement disinterestedness.
ARGUMENT
This Court has authority under Section 105(a) of the Bankruptcy Code to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” It is the Debtor’s position that an order authorizing the Debtor employ an CRO is proper under the circumstances and in the best interests of the Debtor and its creditors, including the Murphy Entities [2]. Bankruptcy courts generally hold considerable authority to involve themselves in the management of a debtor corporation. See, generally, In re Lifeguard Industries, Inc., 37 B.R. 3 (Bankr.S.D.Ohio 1983); In re Potter Instrument Co., 593 F.2d 470 (2d Cir. 1979) Given the circumstances of the case, the Court’s action to fully effect a change in the management of the Debtor is not only authorized but crucial to the ongoing survival of these Debtors. Rule 9001(5) of the Bankruptcy Code provides that a person performing the duties of a debtor-in-possession need not be a officer, director, or controlling shareholder and can serve a Debtor in a capacity defined by the Application and Supplement: When any act is required by these rules to be performed by a debtor … (A) if the debtor is a corporation, “debtor” includes, if designated by the Court, any or all of its officers, members of its board of directors or trustees or of a similar controlling body, a controlling stockholder or member, or any other person in control … . (emphasis added)
[2] Despite their argument to the contrary, the Murphy Entities are not served by the appointment of a Chapter 11
Trustee, in that through the CRO they could be paid through a Plan of Reorganization currently on file with the Court. The Murphy Entities have been unwilling to discuss repayment terms pursuant to a plan; presumably the Murphy Entities are hopeful that a Chapter 11 Trustee will abandon the Pro Mold stock and equipment and Mr.Murphy will have his company back and pocket the $2.5 million already paid to him by Plasticon for Pro Mold.
Clearly, the Bankruptcy Rules allow for circumstances in which a CRO, like Bishop, can take the reins of control of the Debtor as here. The Debtor refers the Court to the case In Matter of Gaslight Club, Inc., 782 F.2d 767 (7th Cir. 1986), in which the Court relied upon the provision of B.R. 9001 as determinative that it had “adequate authority … to approve the replacement of the person designated to perform the duties and exercise the rights of the debtor in possession if the creditors’ committee, the person presently in control and the majority and controlling shareholder of the debtor agree to this course of action.” Id., at 771.
In the present case, both the creditors’ committee and James Turek (who had previously served as President of the Debtor, and is the majority and controlling shareholder) and the Board of Directors have agreed that the appointment of Mr. Bishop as the Chief Restructuring Officer is in the best interests of the Debtor.
Through the Application, Debtor seeks to neutralize the arguments of the U.S. Trustee and the Murphy Entities by removing their cause for concern – namely, Turek. It is the Debtor’s position that it is poised to reorganize under the direction of Bishop as CRO, and the likelihood of moving forward at the current rapid pace is greatly compromised by the appointment of a Chapter 11 Trustee. As stated to the Court in previous oral argument, the delay caused by the appointment of a Chapter 11 Trustee could be fatal to this case.
The Supplement should provide the Court, the U.S. Trustee and the Murphy Entities additional assurances that the role of CRO is completely independent of the Debtor’s prior management and its board of directors as well as clearly define the CRO’s duties and rights. To further bolster Debtor’s continued position that the CRO does not and will not report to or be controlled by prior management in any way, attached hereto is a letter of resignation to Bishop from Turek as well as a Resolution of the Debtor’s Board of Directors delegating all responsibility for management of the Debtor to the CRO. Through the corporate resolution and letter of resignation of Turek, it cannot be made more clear that the Debtor seeks the Court’s approval to employ Bishop through Arcadia Resources to fully supplant the prior management of the Debtor.
GRANTING THE DEBTOR’S APPLICATION OBVIATES ANY GROUNDS FOR THE APPOINTMENT OF A TRUSTEE PURSUANT TO 11 U.S.C. 1104
The U. S. Trustee bases its Motion to Appoint [3] entirely upon 11 U.S.C. 1104(a)(1), which requires the appointment of a trustee: “… for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause, but not including the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor …” (emphasis added) By the very language of the statue under which the U. S. Trustee seeks the appointment of a trustee, it must satisfy this Court that current management, i.e. Bishop as CRO, not past management, is guilty of, inter alia, fraud, dishonesty, incompetence or gross mismanagement of the Debtor’s affairs. This Court’s focus should be on the current activities of the Debtor, not past deeds of mismanagement. See In re Sletteland, 260 B.R. 657 (Bankr.S.D.N.Y. 2001). Any wrongful acts of past management do not necessarily provide grounds for the appointment of a trustee, so long as this Court is satisfied that the current management is “free from the taint of prior management.” In re Microwave Products of America, 102 B.R. 666, 671 (Bankr.W.D.Tenn. 1989). In the case of In re The 1031 Tax Group, LLC, 2007 WL 2298245 (Bankr.S.D.N.Y. 2007), which is analogous to the case at bar, the court applied a heightened level of scrutiny to determine whether newly appointed management was “tainted” due to its relationship with prior management, against whom charges of misfeasance had been made. The court did not look at any past actions; rather, its focus was limited to whether the newly appointed management was sufficiently independent in order to avoid any “taint” from previous management. In that case, Okun, the manager of the debtor, assigned all rights and authority to an independent third party on the eve of filing Chapter 11 in anticipation of a motion to appoint a Chapter 11 Trustee. Sure enough, the United States Trustee filed a motion to appoint a chapter 11 trustee based on the past misdeeds of the debtor under Okun’s watch. The debtor objected, and insisted the court scrutinize the actions of Okun’s replacement, not the deeds of Okun and, in so doing, would not find “cause” for the appointment of a trustee. The Court did conduct an inquiry and found the following factors significant:
a. The new managers had been given exclusive authority to act for the debtor in possession; and would not report to, nor receive any instruction from, the prior tainted manager.
b. The transfer of authority was irrevocable in nature, and would be enforceable under law should the prior manager attempt to re-involve himself in the management of the debtor-in-possession.
c. The tainted management had, in fact, delegated all authority to the new management.
d. The appropriate steps would be, or were being, taken under state law to change the governing structure of the debtor to authorize this change in management and corporate governing structure.
[3] The U.S. Trustee cited to this Court the cases of In Re Cajun Electric Power Coop., Inc., 74F. 3d 599 (5th Cir.
1996) and In Re Marvel Entertainment Group, Inc., 140 F 3rd 463 (3rd Cir. 1998). Neither of these cases is applicable. In Cajun Electric Power Coop., there were conflicts of interest within the members of the Board. In Marvel Entertainment Group, creditors of holding company that held debtor’s stock and gained control of debtor were also creditors of debtor which created a conflict of interest which necessitated the appointment of a trustee. Neither case stands for the proposition cited by the U.S. Trustee that acrimony between the debtor and creditors is grounds for the appointment of a trustee. In fact, in Marvel Entertainment Group, the Court specifically held “that there is no per se rule by which mere conflicts or acrimony between the debtor and creditor mandate the appointment of a trustee.” Id. at 473.
When taken as a whole, the court “expressly f[ound] that taken together these steps have resulted in the Debtors installing new current management, free of any taint associated with Okun or prior management.” Id., at p. 7.
Such is the case here. As with the Debtor 1031 Tax Group, Debtors have taken all necessary steps to replace prior management with Bishop as an independent CRO. In so doing, the Court must look to Bishop’s actions as current management to determine if there is cause to appoint a Chapter 11 Trustee. Debtor submits the Court will find none. In the matter at hand, the evidence will indicate that the Application and Supplement shows the appointment of a Chief Restructuring Officer that is sufficiently independent and insulated from any “taint” of prior management. Acting on Debtor’s agreement, counsel for Debtor sought a Chief Restructuring Officer. Counsel, not prior management, selected Bishop as a Chief Restructuring Officer, which selection Debtor has ratified. The Affidavit of Turek and the Board Resolution establish the irrevocability of this delegation of management authority to Bishop. Turek himself has agreed not to interfere or participate in any manner in the management of the Debtor.
APPOINTMENT OF A CHIEF RESTRUCTURING OFFICER, RATHER THAN A
TRUSTEE, IS CONSISTENT WITH THE PRINCIPLES OF SECTION 1104
In a Chapter 11 case, a strong presumption exists that the Debtor should retain control of its affairs; a trustee should only be appointed when a moving party demonstrates by “clear and convincing evidence” that appointment is authorized under the statute. In re Sharon Steel Corp., 871 F.2d 1217, 1225 (3d Cir. 1989); In re Tyler, 18 B.R. 574, 577 (Bankr.S.D.Fla. 1982). The appointment of a trustee under Section 1104 is an “extraordinary remedy.” See In re Hotel Associates, Inc., 3 B.R. 343, 345 (Bankr.E.D.Pa. 1980). It has also been referred to as a “remedy of last resort.” In re W.R. Grace & Co., 285 B.R. 148, 158 (Bankr.D. Del. 2002). No such comparable statement exists as concerns the appointment of new management when the Debtor’s current management, board of directors and creditors’ committee all agree that such action is in the best interests of the Debtor.
If there is a remedy short of appointment of a trustee under Section 1104, available - - and there is - - this Court should give it every just consideration before resorting to the “extraordinary” remedy of appointing a Chapter 11 Trustee. In the present case, there is no affirmative evidence demonstrating any “taint” that can be ascribed to Bishop’s current management; no affirmative evidence suggesting that the Debtor will be better off in the control of a trustee rather than Bishop, an independent Chief Restructuring Officer; and no affirmative evidence suggesting that Turek will exert any managerial authority over the Debtor’s affairs. Mere “unfamiliarity” with the newly appointed management is no legal equivalent for the “taint” that the U. S. Trustee must establish in order to have a trustee appointed. The U.S. Trustee’s and the Murphy Entities’ entire legal argument is based on the alleged actions of Mr. James Turek, but Turek has irrevocably removed himself from the management of the Debtor’s affairs. Any allegations as to what Turek has done in the past have absolutely no bearing on whether “cause” lies to remove “current management” in favor of a trustee.
Principles of fairness and equity pervade the Bankruptcy Code, and thus granting the Debtor’s Application would advance and not hinder these principles.
WHEREFORE, Debtor respectfully request that the employment of William D. Bishop, as Chief Restructuring Officer to manage it in this Chapter 11 case be approved by this Court and that the Motions to Appoint be overruled.
FOWLER MEASLE & BELL PLLC
/s/ Ellen Arvin Kennedy
Ellen Arvin Kennedy, Esq.
Timothy A. West, Esq.
300 West Vine Street, Suite 600
Lexington, KY 40507-1660
(859) 252-6700
(859) 255-3735 fax
EAKennedy@FowlerLaw.com
TWest@FowlerLaw.com
ATTORNEYS FOR DEBTOR,
PLASTICON INTERNATIONAL, INC.
CERTIFICATE OF SERVICE
I hereby certify that the foregoing was served this the 2nd day of October, 2007, electronically in accordance with the method established under this Court’s CM/ECF Administrative Procedures and Standing Order dated July 25, 2002 upon all parties in the electronic filing system in this case and was served upon those listed on the Master Service List No. 1, by first class postage paid mail, electronic service or via email.
/s/ Ellen Arvin Kennedy
ATTORNEY FOR DEBTOR |
