92nd Annual National Conference of Bankruptcy Judges October 28-31, 2018 San Antonio, TX
Corporate Governance Issues
Stephen B. Darr, Managing Director, Huron Consulting Group William K. Harrington, U.S. Trustee, Regions 1&2 S. Gregory Hays, Founder & Managing Principal, Hays Financial Consulting, LLC Hugh Sawyer, President & CEO, Regis Corporation
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UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF GEORGIA ATLANTA DIVISION
IN RE: ) CHAPTER 11 ) AMERICAN UNDERWRITING ) CASE NO. 18-58406 - SMS SERVICES, LLC, ) ) Debtor. )
UNITED STATES TRUSTEE’S OBJECTION TO DEBTOR’S AMENDED APPLICATION TO EMPLOY KEVIN VAN DE GRIFT OF GGG PARTNERS, LLC AS CHIEF RESTRUCTURING OFFICER
COMES NOW Daniel M. McDermott, United States Trustee for Region 21, and objects to
Debtor’s Application to Employ Kevin Van de Grift of GGG Partners, LLC as Chief Restructuring
Officer (the “Application;” Doc. No. 38). In support of his objection, the United States Trustee
states the following:
I. BACKGROUND
1. On May 18, 2018, American Underwriting Services, LLC (“Debtor”) filed a voluntary petition for relief under chapter 11 of the United States Bankruptcy Code.
2. To date, no trustee has been appointed in Debtor’s case, and Debtor continues in possession of its property and operation of its business as debtor in possession, consistent with 11
U.S.C. §§ 1107 and 1108.
3. Debtor describes itself as “a program insurance underwriter offering products to fit the insurance needs of various transportation related businesses such as commercial auto liability, including business auto, auto physical damage, motor truck cargo, and general liability.”
4. Debtor is a Georgia limited liability company with a single member. Case 18-58406-sms Doc 53 Filed 06/06/18 Entered 06/06/18 09:54:00 Desc Main Document Page 2 of 9
5. Debtor’s sole member is The Wiley Group, Inc., which has one shareholder, Mr.
James Russell Wiley (“Mr. Wiley”).
6. On May 31, 2018, Debtor filed the Application, seeking approval of the employment of Kevin Van de Grift (“Mr. Van de Grift”) of GGG Partners, LLC (“GGG”) as Chief
Restructuring Officer (“CRO”) pursuant to 11 U.S.C. § 327.
7. Upon information and belief, Debtor engaged the CRO on or about May 18, 2018
in conjunction with the filing of the bankruptcy petition.
8. According to the application, the CRO will assume all responsibility of the debtor
in possession, including all operations of Debtor’s business and financial affairs.
9. In connection with the filing of the bankruptcy case, and in compliance with the
United States Trustee’s Operating Guidelines and Reporting Requirements for Debtors in
Possession, the CRO opened new banking accounts at East West Bank on which the CRO is the
sole signatory.
II. STATEMENT OF APPLICABLE STATUTES AND RULES
10. Section 327(a) of the Bankruptcy Code provides, in pertinent part,
the trustee, with the court’s approval, may employ one or more attorneys, accountants, appraisers, auctioneers, 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. The Bankruptcy Code defines “disinterested person” as
a person that– (A) is not a creditor, an equity security holder, or an insider; (B) is not and was not, within 2 years before the date of the filing of the petition, a director, officer, or employee of the debtor; and (C) does not have an interest materially adverse to the interest of the estate or any class of creditors or equity security holder, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason.
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12. When the debtor is a corporation, the term “insider” includes directors, officers,
and persons in control of the debtor. 11 U.S.C §101(31)(B).
13. Section 1107(a) of the Bankruptcy Code provides,
[s]ubject to any limitations on a trustee serving in a case under this chapter, and to such limitations or conditions as the court prescribes, a debtor in possession shall have all the rights, other than the right to compensation under section 330 of this title, and powers, and shall perform all the functions and duties, except the duties specified in sections 1106(a)(2), (3), and (4) of this title, of a trustee serving in a case under this chapter.
III. GGG AND MR. VAN DE GRIFT ARE NOT DISINTERESTED
14. The relief sought in the Application provides Mr. Van de Grift with the power and authority to assume all management and financial control of the Debtor, including:
a) Being the sole signatory on all Debtor’s post-petition account;
b) Tracking and accounting of all accounts receivable and accounts payable;
c) Determining how to address the distribution of pre-petition funds received
by Debtor but not deposited into Debtor accounts and utilization of post-petition funds;
d) Chapter 11 plan formulation, including determining which causes of action
to pursue and settlements related to those causes of action; and
e) Financial reporting, including the filing of monthly operating reports.
15. The Application further provides that GGG is manager of Debtor and Mr. Van de
Grift is the CRO.
16. Debtor has argued to this Court that in connection with the filing of this bankruptcy case, Debtor undertook to replace its pre-petition management with GGG and Mr. Van de Grift.
17. Since the filing of this case, and despite no order approving the Application, Debtor has held out that the proposed CRO is the current person in control of Debtor. Case 18-58406-sms Doc 53 Filed 06/06/18 Entered 06/06/18 09:54:00 Desc Main Document Page 4 of 9
18. Section 327(a) of the Bankruptcy Code provides that a trustee, or debtor-in-
possession, may employ professional persons who do not hold an interest adverse to the estate and
who are disinterested. If an applicant for retention under section 327(a) possesses an adverse
interest or fails to be disinterested, retention must be denied. In re Keller Financial Services of
Florida, Inc., 248 B.R. 859, 892 (Bankr. M.D. Fla. 2000). Further, a bankruptcy court cannot use
its equitable powers or discretion to approve a professional who is not disinterested. See In re
Middleton Arms Ltd. P’ship, 934 F.2d 723, 725 (6th Cir. 1991) (holding that court “cannot use
equitable principles to disregard unambiguous statutory language even after finding the debtor
would be best served by employing a professional who is not disinterested as a result of being an
insider of the debtor).
19. A disinterested person is one who is not a creditor, equity security holder, or insider.
11 U.S.C. § 101(14)(A). Officers and persons in control of the debtor are insiders. 11 U.S.C. §
101(31)(B).
20. Mr. Van de Grift is a person in control of the Debtor. A person has control when he
determines corporate policy, whether by assuming management responsibility or by selecting
management personnel. In re Sullivan Haas Coyle, Inc., 208 B.R. 239, 243 (Bankr. N.D. Ga.
1997). In this case, by the Debtor’s own admission, Mr. Van de Grift took full control over
Debtor’s operations in connection with the filing of this bankruptcy case.
21. Mr. Van de Grift, in his individual capacity, is an officer of the Debtor. Pursuant to
a previously tendered Engagement Letter (Doc. No. 4, Exhibit A), as amended by the Application,
Mr. Van de Grift took the title of Chief Restructuring Officer of the Debtor and GGG took the
position of manager. Mr. Van de Grift has sole discretion to manage Debtor and has no duty to Case 18-58406-sms Doc 53 Filed 06/06/18 Entered 06/06/18 09:54:00 Desc Main Document Page 5 of 9
report to any entity prior to taking actions on behalf of the Debtor. Therefore, Mr. Van de Grift is
not disinterested and cannot be retained under 11 U.S.C. § 327(a).
22. Based on the language of the Bankruptcy Code, GGG and Mr. Van de Grift fail the disinterestedness test and cannot be retained under 11 U.S.C. § 327(a). See, e.g. In re Capitol
Metals Co., Inc., 228 B.R. 724 (9th Cir. B.A.P. 1998) (financial company ineligible to serve as
debtor’s post-petition financial adviser where company’s principal functioned as debtor’s
prepetition chief financial officer); In re Weaver Potato Chip Co., Inc., 243 B.R. 737, 740 (Bankr.
D. Neb. 2000).
IV. DEBTOR’S PROPOSED MANAGEMENT STRUCTURE VIOLATES THE CODE
23. The options available for control of the debtor under chapter 11 are limited to a
trustee or the debtor in possession. In re Roxwell Performance Drilling, LLC, No. 13-50301-RLJ-
11, 2013 WL 6799118 at *4 (Bankr. N.D. Tex. Dec. 20, 2013) (“The authority under chapter 11
to manage the debtor's assets and affairs lies exclusively with either the debtor as debtor in
possession or a chapter 11 trustee.”); Matter of Plantation Inn Partners, 142 B.R. 561, 564 (Bankr.
S.D. Ga. 1992) (granting UST’s motion to appoint a chapter 11 trustee and opining that the
Bankruptcy Code contemplates that administration of a chapter 11 case be managed by a trustee or a debtor in possession, not a hybrid created by judicial fiat).
24. The CRO would, in essence, be acting as a trustee, however, a true fiduciary is not in place, as neither an independent CRO supervised by Debtor’s members or managers nor a debtor in possession would be at the helm of this case.
25. The control structure sought in this case by the debtor in possession is a hybrid, consisting of a CRO with expansive powers and no oversight or management by the actual debtor in possession. The debtor in possession should be in control, but is not. The CRO should be Case 18-58406-sms Doc 53 Filed 06/06/18 Entered 06/06/18 09:54:00 Desc Main Document Page 6 of 9
subject to oversight by the debtor in possession but is not. Thus, the current management structure violates the Code.
26. Mr. Van de Grift is effectively granted many of the powers of a chapter 11 trustee, without being subject to proper fiduciary controls in accordance with the Bankruptcy Code. Mr.
Van de Grift as CRO is not subject to full oversight by Debtor due to the terms of the Application
which severely limit current management’s role. According to representations by Mr. Wiley, Mr.
Wiley’s responsibilities will be limited to maintaining relationships with insurance companies and
insurance agents, and Mr. Wiley will not be permitted to terminate the CRO without authorization
from the Court.
27. Under Georgia law, only a limited liability company’s members and managers have
the authority to exercise the LLC’s business judgment and otherwise bind the LLC. See Ga. Code
Ann. § 14-11-100 et seq.
28. The Bankruptcy Code does not alter Georgia’s corporate governance laws and,
therefore, neither the Court nor a debtor’s professionals may exercise the debtor’s business
judgment. If no trustee is appointed, the debtor in possession, with the assistance of its professionals must operate debtor’s business and oversee its financial affairs.
29. The appointment of a chapter 11 trustee would provide appropriate fiduciary management of the Debtor. The appointment of a trustee would also serve the interest of creditors by assuring that the fiduciary duties and powers of a trustee are exercised by an officer clearly empowered under the Bankruptcy Code and who is independent from real or perceived ties to
Debtor’s current management.
30. The Court should decline to exercise discretion under 11 U.S.C. § 1107(a) to appoint a non-trustee fiduciary where the exercise of discretion would circumvent other sections Case 18-58406-sms Doc 53 Filed 06/06/18 Entered 06/06/18 09:54:00 Desc Main Document Page 7 of 9
of the Code, including section 1104(a). See In re Adelphia Communications Corp., et al., 336 B.R.
610, 664-66 (Bankr. S.D.N.Y. 2006) (“At the least, where imposing the desired conditions would
have the effect of circumventing other sections of the Code, or come close to doing so . . . the
Court believes that it should be very slow to exercise its discretion in that manner. Indeed, that
may be altogether forbidden.”); but see In re Blue Stone Real Estate Const. & Development, 392
B.R. 897 (Bankr. M.D. Fla. 2008) (appointing a CRO with expanded, trustee-like duties where
maintaining the status quo pending trial on a motion to appoint a trustee would potentially harm
the debtors’ estates).1
V. CONCLUSION
31. Based on the language of the Bankruptcy Code and Debtor’s representations
regarding GGG and Mr. Van de Grift’s positions with the Debtor, both GGG and Mr. Van de Grift
are not disinterested and cannot be retained under 11 U.S.C. §327.
32. Debtor’s proposed management structure violates the Bankruptcy Code because it
would be an impermissible hybrid between a debtor in possession and chapter 11 trustee.
33. Cause exists for the appointment of a chapter 11 trustee in light of the limitations
on Debtor’s current management that restricts it from exercising complete and unfettered oversight
of the CRO and the other powers necessary to ensure the Debtor fulfills its obligations. Further,
Debtor is proposing the bulk of the Debtor’s authorities and powers be vested in Mr. Van de Grift,
a CRO that is not subject to appropriate fiduciary controls and oversight. This hybrid formula for
bifurcated power is not contemplated by the Bankruptcy Code and demonstrates that the Debtor
1 The Blue Stone case is distinguishable from Debtor’s case because in Blue Stone, the United States Trustee’s motion to appoint a chapter 11 trustee was not scheduled for trial for several weeks. The Court was faced with the choice of appointing a CRO with expanded responsibilities or leaving current, problematic management in place until the trustee motion could be heard. The United States Trustee appealed the order approving the employment of the CRO, but the United States Trustee voluntarily dismissed the appeal when the debtor confirmed its plan of reorganization. Case 18-58406-sms Doc 53 Filed 06/06/18 Entered 06/06/18 09:54:00 Desc Main Document Page 8 of 9
lacks strong and impartial management with a clear duty to act in the interests of all creditors.
34. The appointment of a chapter 11 trustee would remove any doubt regarding the
authority of the person administering the estate and furthers the interests of creditors.
WHEREFORE, the United States Trustee respectfully requests the Court (i) enter an order
denying the Application, (ii) enter an order directing the United States Trustee to appoint a chapter
11 trustee, and (iii) grant such other relief as the Court may deem just and proper.
DANIEL M. MCDERMOTT UNITED STATES TRUSTEE REGION 21
By: /s/ Lindsay P. S. Kolba Georgia Bar No. 541621 United States Department of Justice Office of the United States Trustee 362 Richard Russell Building 75 Ted Turner Drive, SW Atlanta, Georgia 30303 (404) 331-4437 [email protected]
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CERTIFICATE OF SERVICE
I hereby certify that on June 6, 2018, I caused a copy of this Motion to Dismiss Case with Minimum One Year Bar to Refiling to be served by First Class United States mail, with adequate postage to ensure to delivery to:
American Underwriting Services, LLC Anna Mari Humnicky 1255 Roberts Blvd. Small Herrin, LLP Suite 102 Suite 200, Two Paces West Kennesaw, GA 30144 2727 Paces Ferry Road Atlanta, GA 30339
Gary W. Marsh Dentons US, LLP Suite 5300, One Peachtree Center 303 Peachtree Street Atlanta, GA 30308
/s/ . Lindsay P. S. Kolba Trial Attorney
Trustee Appointments and Corporate Governance of a Debtor
I. Legal Analysis – Trustee Appointments.
1. Appointment of Trustee A. Generally 1. The appointment of a chapter 11 trustee is governed by 11 U.S.C. § 1104. 2. Section 1104(a)(1) addresses the appointment of a trustee for cause based on management’s pre and post-petition misdeeds or mismanagement, while subsection (2) provides the court with “particularly wide discretion” to appoint a trustee even absent wrong doing or mismanagement in the interests of creditors. In re Bellevue Place Assocs., 171 B.R. 615, 623 (N.D. Ill. 1994). 3. Section 1104(e) directs the United States Trustee to seek the appointment of a chapter 11 trustee under subsection (a) if there are reasonable grounds to suspect that current members of the governing body of the debtor, the debtor’s chief executive or chief financial officer, or members of the governing body who selected the debtor’s chief executive or chief financial officer, participated in actual fraud, dishonesty or criminal conduct in the management of the debtor or the debtor’s public financial reporting. 11 U.S.C. § 1104(e). 4. Where the Court finds either that cause exists or that appointment is in the interest of the parties, an order for the appointment of a trustee is mandatory. Official Comm. of Asbestos Pers. Injury Claimants v. Sealed Air Corp. (In re W.R. Grace & Co.), 285 B.R. 148, 158 (Bankr. D. Del. 2002). 5. A trustee appointed in a chapter 11 case must meet the disinterested person requirement. 11 U.S.C. § 1104(d).
B. Section 1104(a)(1) Appointment for Cause
1. Section 1104(a)(1) mandates that the Court appoint an independent chapter 11 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…” 11 U.S.C. § 1104(a)(1).
2. A movant must establish “cause” by a preponderance of the evidence. Tradex Corp. v. Morse, 339 B.R. 823, 829- 830 (D. Mass. 2006).
3. The categories enumerated in subsection (1) of the Bankruptcy Code section 1104(a) “cover a wide range of conduct” and, thus, are best described as exemplary, rather than exclusive. See In re Marvel Entm’t Corp., 140 F.3d 463, 472 (3d Cir. 1998) (quoting Committee of Dalkon Shield Claimants v. A.H. Robbins Co., 828 F.2d 239, 242 (4th Cir. 1987)).
4. The determination of whether cause exists must be taken on a case by case basis, taking into account all relevant factors. In re Sharon Steel Corp., 871 F.2d 1217, 1225 (3d Cir. 1989). In making that determination, courts should be cognizant of the fact that “section 1104 represents a protection that the Court should not lightly disregard or encumber with overly protective attitudes towards debtors-in-possession.” In re V. Savino Oil & Heating Co., Inc., 99 B.R. 518, 525 (Bankr. E.D.N.Y. 1989).
C. Section 1104(a)(2) Appointment in the Interests of Creditors
1. Section 1104(a)(2) mandates the appointment of a chapter 11 trustee, if doing so is “in the interests of creditors . . . .” 11 U.S.C. § 1104(a)(2).
2. Courts have construed subsection (a)(2) to provide for a “flexible standard” and have “allow[ed] the appointment of a trustee even when no “cause exists.” See e.g. In re Sharon Steel Corp., 871 F.2d at 1226. See also In re Ionosphere Clubs, Inc., 113 B.R. 164 (Bankr. S.D.N.Y. 1990). Subsection (a)(2) emphasizes the court’s discretion allowing it to appoint a trustee when to do so would serve the parties’ and the estates’ interests.” Id.
3. In determining whether the appointment of a trustee is in the interests of the various constituencies of the estate courts consider: (1) the trustworthiness of the debtor, (2) the past and present performance of the debtor and the prospects for rehabilitation, (3) the confidence level of creditors and the business community in the debtor, and (4) whether the benefits of appointing a trustee outweigh the associated costs. United Sur. & Indem. Co. v. López–Muñoz (In re López–Muñoz), 553 B.R. 179, 195– 96 (BAP 1st Cir. 2016) (citing Taub v. Taub (In re Taub), 427 B.R. 208, 227 (Bankr. E.D.N.Y. 2010)).
2. Avoidance of Trustee Appointment When Cause Exists.
• Without expressly saying so, applications to appoint a CRO seek to appoint the CRO as de facto chapter 11 trustee under 11 U.S.C. § 1104(a), while exempting the CRO from the qualifications of serving. See, e.g., 28 § U.S.C. 586(a)(1) (mandating that the United States Trustee supervise chapter 11 trustees).
• The appointment of a CRO is not an appropriate remedy to the Debtor’s own prepetition misconduct and mismanagement. A CRO may not usurp the role of the debtor-in-possession, nor can a CRO, as an officer or quasi-officer, satisfy the disinterestedness requirements of Section 327(a).
A. CRO Cannot Exercise the Rights, Powers and Duties of the Debtor-in- Possession or Chapter 11 Trustee.
1. It is axiomatic that a debtor-in-possession is a fiduciary: • Under 11 U.S.C. § 1107(a), a chapter 11 debtor-in-possession assumes all of the rights and powers (and most of the duties) of a trustee. Section 1107(a) “requires the debtor-in-possession to perform most of the functions and duties of a chapter 11 trustee . . .” under 11 U.S.C. 1106(a), which, in turn, incorporates certain duties imposed upon chapter 7 trustees under 11 U.S.C. 704. 7 Collier on Bankruptcy ¶ 1107.01 – 1107.02 (Alan N. Resnick & Henry J. Sommer, eds., 16th ed. rev. 2012).
• Among other things, a debtor-in-possession must account for all property received, examine proofs of claim, furnish information to parties in interest, file reports with the United States Trustee and taxing authorities, prepare and file a final account and file a plan of reorganization or report on why a plan cannot be filed. Id.; 11 U.S.C. 1107. See 11 U.S.C. 350, 502, 1125 and 1129.
• The Code also provides a debtor-in-possession with powers to finance its operations through the use of cash collateral or post-petition loans, to sell assets and to commence avoidance actions. See 11 U.S.C. 363, 364, 544, 547, 548 and 550.
• Section 1108 authorizes a debtor-in-possession to operate its business. 11 U.S.C. § 1108.
• A debtor-in-possession is not only the estate representative under 11 U.S.C. § 323(a), with the capacity to sue and to be sued, but also a fiduciary of “the estate and its constituents,” including creditors. In re DN Assocs., 144 B.R. 195, 198 199 (Bankr. D. Me. 1992), aff’d, Casco Northern Bank, NA v. DN Assocs. (In re DN Assocs.), 3 F.3d 512, 514 - 515 (1st Cir. 1993).
• As a fiduciary, the debtor-in-possession does not act in its own interest but, like a trustee, must act in the best interest of the creditors of the estate. Commodity Futures Trading Com’n v. Weintraub, 473 U.S. 343, 354 (1985).
• A debtor-in-possession “is also bound by a duty of loyalty that includes an obligation to refrain from self-dealing, to avoid conflicts of interests and the appearance of impropriety, to treat all parties to the case fairly and to maximize the value of the estate . . . .” Collier at ¶ 1107.02[4] (citing cases).
2. Congress provided no other way to replace debtor’s management’s control of the case with an independent fiduciary other than the appointment of a trustee pursuant to 11 U.S.C. § 1104(a). Professionals being retained under Section 327(a) cannot exercise the rights, powers and duties of a debtor-in-possession or a chapter 11 trustee.
3. By separating the comprehensive rights, duties and powers of a debtor-in- possession at sections 323, 704, 1106, 1107 and 1108 from the discrete tasks of an estate professional at section 327(a) and by prohibiting the debtor-in-possession from being compensated as a professional under sections 330 and 331, Congress made clear 1) that a debtor and a professional perform independent functions and 2) that one cannot usurp the function of the other.
4. Either the Debtor is in possession and in control of its affairs, including the power to make business decisions, through its management, or it is not. “The latter situation contemplates and mandates the appointment of a trustee . . . When a trustee is appointed, . . . control [over the debtor’s affairs] is transferred to the trustee who assumes the decision-making function previously held by the debtor’s management . . . .” In re Casco Bay Lines, Inc., 17 B.R. 946, 951 – 952 (B.A.P. 1st Cir. 1982) (affirming order appointing an operating chapter 11 trustee).
B. As an Officer or Quasi-Officer, a CRO Cannot Satisfy the Disinterestedness Requirements of Section 327(a) and Is Therefore Disqualified from Serving as a Professional.
1. Under 11 U.S.C. 327(a), a debtor in possession, subject to court approval, may seek to retain one or more professional persons to “represent or assist the trustee in carrying out the trustee’s duties . . .” under the Code, provided that the person: 1) does not represent an interest adverse to the estate; and 2) is disinterested. Rome v. Braunstein, 19 F.3d 54, 57 - 58 (1st Cir. 1994).
2. Section 101(14) defines “disinterested person” as one that:
(A) is not a creditor, and equity security holder, or an insider ...
(E) does not have an interest materially adverse to the interest of the estate or any class of creditors . . . 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)
3. Where the debtor is a “corporation,” the term “insider” includes “officer of the debtor” under 11 U.S.C. § 101(31)(B)(ii).
4. Basic principles of statutory construction dictate that the Bankruptcy Code be interpreted as a whole. See Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548, 559 (3d Cir. 2003). Accordingly, to the extent that the Bankruptcy Code provides authority for the debtor in possession to employ “professional persons” under one section of the Code (11 U.S.C. § 327(a)) subject to certain qualifying requirements, the debtor in possession and the professional at issue should not be permitted to evade or ignore those requirements by shopping for a less-specific section of the Code that does not contain the same requirements. See F/S Airlease II, Inc. v. Simon (In re F/S Airlease II, Inc.), 844 F.2d 99, 108-09 (3d Cir. 1988) (refusing to permit professional that was unable to meet requirements for employment under 11 U.S.C. § 327(a) to seek compensation under 11 U.S.C. § 503(b)(1)(A)). 5. A CRO is a professional person whose employment must be approved under 11 U.S.C. § 327(a). See In re First Merchants Acceptance Corp., 1997 WL 873551 at *2, 3 (D. Del. Dec. 15, 1997) (Farnan, C.J.) (describing “quantitative” and “qualitative” tests for evaluating whether an entity is a “professional” under 11 U.S.C. § 327(a)). However, because a CRO is not a “disinterested person,” he or she is not eligible for employment under section 327(a). Rome v. Braunstein, 19 F.3d 54 at 57- 58.
6. A CRO’s status as an “officer” and/or a “director” and, by extension, his lack of disinterestedness, will be imputed to his or her firm. See In re Essential Therapuetics, Inc., 295 B.R. 203, 208-11 (Bankr. D. Del. 2003) (partner’s status as pre-petition “officer” properly imputed to firm).
7. A corporation’s Board constitutes the governing body of the debtor, having the power to hire and fire officers. 7 Collier on Bankruptcy ¶ 1108.02 (Alan N. Resnick & Henry J. Sommer, eds., 16th ed. rev. 2012); 11 U.S.C. §§ 1107 and 1108.
8. A CRO reporting to a tainted Board is subject to competing adverse interests which disqualify him or her from serving as a professional under Section 327. The Bankruptcy Code does not define “adverse interest” but court have interpreted the term to mean
the possess[ion] of assert[ion] [of] mutally exclusive claims to the same economic interest, thus creating either an actual or potential dispute between rival claimants as to which … of them the disputed right or title to the interest in question attaches under valid and applicable law; or … [the possession of] a predisposition or interest under circumstances that render such a bias in favor of or against one of the entities….
Rome v. Braunstein, 19. F3d. at 58 n.1.
9. Entry of an order employing the CRO under 11 U.S.C. § 327(a) will not neutralize, in itself, the appearance of a conflict. In re Martin, 817 F.2d 175, 181 (1st Cir. 1987).
II. Case Summary - Recent Cases Involving Corporate Governance Questions:
#1: [Firestar Diamond, Inc. - SDNY]
Background
Nirav Modi and certain of the entities he controls, directly or indirectly -- together with other individuals and entities – allegedly perpetrated the largest bank fraud in the history of India. On February 23, 2018, India’s National Company Law Tribunal (the “NCLT”) issued an order barring numerous Respondents from removing, transferring, or disposing of assets connected to Modi’s enterprises. The NCLT order effectively froze the operations of Indian companies that supplied goods and services to Firestar Diamond Inc., as well as other Modi entities operating in New York (collectively, the “NY Firestar Entities”).
The Chapter 11 Case
Concerned about, inter alia, the possible role played in the fraud by the NY Firestar Entities’ principal, Mihir Bhansali (one of the Respondents named in the NCLT order), HSBC Bank USA and Israel Discount Bank, the NY Firestar Entities’ secured lenders, suggested that the NY Firestar Entities retain a chief restructuring officer. Mark Samson of Getzler Henrich & Associates, LLC was retained as the Debtors’ Chief Restructuring Officer. Thereafter, because their supply chain was cut off, the three Firestar Entities filed Chapter 11 petitions in the SDNY on February 26, 2018. (Firestar Diamond, Inc., et al., Case No. 18-10509 (SHL)) Shortly thereafter, the Debtors named Neil Bivona as an “independent director,” and Mr. Bhansali resigned from the board.
On March 30, 2018, the United States Trustee moved for the appointment of an Examiner. By Order dated April 13, 2018, the Court granted the motion and the United States Trustee appointed John J. Carney, Esq. as examiner. By Order dated April 20, 2018, the Court approved Mr. Carney’s appointment. The examiner was tasked with investigating, among other things, the role of Mr. Modi in the operations of the debtors and the extent to which the debtors and their principal are involved in the alleged fraud in India.
At or around that same time, the debtors filed a motion for the approval of a Key Employee Retention Plan, to which the United States Trustee objected. The KERP Motion was subsequently adjourned several times and likely has been rendered moot by recent activity in the case.
Meanwhile, the Debtors launched a sale process. That process resulted in an auction sale of the assets of debtor A. Jaffe Inc. to a high bidder. However, at the May 15, 2018 hearing on the motion for approval of the sale of the A. Jaffe assets, the Court directed the debtors to supply information as to the liquidation value of the A. Jaffe assets and the debtors’ business judgment in evaluating the propose purchase price for those assets. The Court also directed the debtors to disclose any and all communications between the debtors and Mr. Modi with respect to the sale process, as well as whether Mr. Modi had any connections to the winning bidder. After scheduling a deposition of Mr. Bhansali to inquire about the issues raised by the court, counsel to Punjab National Bank was informed that Mr. Bhansali had just resigned as President of the debtors and that he would not appear at the deposition. Shortly thereafter, the debtors filed a notice of withdrawal of the sale motion.
Punjab National Bank filed a motion for the appointment of a Chapter 11 trustee, and the United States Trustee filed a motion for a Chapter 11 trustee or, alternatively, for the conversion of the case to Chapter 7 (collectively the “Trustee Motions”). Debtors filed a response to the Trustee Motions explaining their efforts during the case but indicating they indicated that they would not oppose the Trustee Motions. On June 8, 2018, the Court entered an order directing the United States Trustee to appoint a Chapter 11 Trustee.
#2 Woodbridge Group of Companies, Inc. - Delaware:
In early December 2017, Woodbridge Group of Companies, Inc., comprised of over 278 entities (now 306 entities), filed for bankruptcy as a result of mounting pressure from the SEC. The SEC and other regulators had alleged that the debtors’ principal, Robert Shapiro, orchestrated a massive Ponzi scheme and raised more than a billion dollars from investors through real estate fraud. The SEC alleged that Woodbridge solicited short-term and long-term (purportedly secured) notes for the stated purpose of making loans to third parties in connection with luxury real estate development, but instead, used the funding primarily to make interest payments to prior investors and to acquire, through affiliated subsidiaries real property. Prior to the bankruptcy filing, the debtors’ professionals appointed an “independent manager” of each of the debtor entities, which, in turn, appointed a CRO. Mr. Shapiro was to serve as a “consultant” to the debtors, and would be compensated $175,000 per month and allowed to retain use of two properties as personal residences (although the debtors did not seek Court approval of this agreement). In late December 2017 and early January 2018, the OCUC and the SEC filed emergency Motions to Appoint a Ch. 11 Trustee. The OUST filed an Omnibus Response in Support of the Trustee Motions. Trial on the Trustee Motions proceeded across several days, beginning January 10, 2018 and resuming on January 18, 2018. Before the trial concluded, the debtors announced the appointment of three additional independent directors: Hon. James Peck, Hon. Robert Gerber and Jan Baker, who would each be compensated $25,000 per month. On January 23, 2018, the Court entered an order approving a settlement term sheet, which provided that the board of directors would be reconstituted as a 3-person board (Richard Nevins, Freddie Reiss and Michael Goldberg). In accordance with the settlement term sheet, the new board selected Fred Chin as CEO and Brad Sharp as CRO. Two Ad Hoc investor groups were also conferred special status by the Court to resolve pending requests for the appointment of additional committees to represent the purportedly secured noteholders, and the quasi-equity like noteholders. The settlement term sheet also provided for the dismissal of the Trustee Motions with prejudice.
#3 In re Zohar III, Corp. - Delaware:
On March 11, 2018, Zohar III, Corp. and 5 other debtors filed for bankruptcy, primarily as a result of ongoing acrimonious litigation between Lynn Tilton and MBIA Insurance Corporation, Zohar III Controlling Class of Noteholders, and AMZM, the collateral manager of the Debtors. The litigation, in part, revolved around the governance and ownership of the Debtors and Ms. Tilton’s alleged abuse of the Debtors. On March 26, 2018, MBIA and Zohar III Controlling Class of Noteholders filed a motion to dismiss the bankruptcy case, or in the alternative, appoint a chapter 11 trustee. The basis of the parties’ motion was the alleged abuse by Ms. Tilton and the longstanding acrimony between the parties. On April 3, 2018, the Office of the United States Trustee filed a motion to appoint a Chapter 11 trustee, or, in the alternative, an examiner. The basis for the OUST motion was the extreme acrimony between all of the parties and an inability of Lynn Tilton to fulfill her fiduciary duties due to incurable conflicts. A day before the trial was supposed to begin, and after several days of depositions, Judge Kevin Gross conducted a mediation of the issues relating to the pending motion to dismiss. The mediation lasted several days, with the trial being continued to accommodate the mediation. Ultimately, the result of the mediation was an agreement between the parties (not including the OUST) that Judge Gross would appoint an independent director and the independent director would select a Chief Restructuring Officer. As a result of the agreement, MBIA and Zohar II Controlling Class of Noteholders agreed to withdraw their motion to dismiss. On May 21, 2018, the Court entered an order approving the settlement agreement.
Steve Darr, Huron
Mr. Darr has more than 30 years of experience providing accounting, auditing and financial consulting services to business organizations, many of which are experiencing significant financial and operating difficulties. Mr. Darr has led advisory engagements involving several significant reorganization cases, has served in a variety of fiduciary capacities, including Creditors’ Trustee, Liquidating Trustee, Assignee for the Benefit of Creditors and Chapter 11 Trustee. In addition, Mr. Darr was formerly a Chapter 7 Trustee for the District Of New Hampshire. Mr. Darr’s experience includes identification and pursuit of potential causes of action, including tortious interference claims, claims against directors and officers, fraudulent conveyance, preferential payments, solvency, indubitable equivalency and other related matters.
William K. Harrington is the United States Trustee for Region 1 and Region 2. Mr. Harrington was appointed as the United States Trustee for Region 1 on November 8, 2010 and as the United States Trustee for Region 2 on November 26, 2013. Prior to his appointment as the United States Trustee for Region 1, Mr. Harrington was the Assistant United States Trustee for the District of Delaware. Prior to joining the Office of the United States Trustee, he practiced bankruptcy and reorganization law at Duane Morris LLP. Mr. Harrington is a member of the Boston Bar Association, the Delaware State Bar Association, the American Bar Association, the American Bankruptcy Institute and the Delaware Bankruptcy American Inn of Court. He received his undergraduate degree from the University of Pennsylvania and his J.D. from Villanova University School of Law.
S. Gregory Hays, CTP, CIRA
Hays Financial Consulting, LLC 2964 Peachtree Road, N.W. Atlanta, GA 30305 Office: (404) 926-0051 Mobile: (404) 218-1088
Mr. Hays is a court appointed fiduciary and forensic accountant that specializes in recovering funds from insolvent companies and investment offerings. He is routinely appointed by federal and state courts as a receiver or bankruptcy trustee to manage businesses in order to maximize recovery for creditors. He has been appointed as a fiduciary by courts in seven states.
Mr. Hays is a recognized expert in Ponzi schemes and receiverships and has been quoted in many articles in national publications. The TV show American Greed featured a story on the Al Parish Ponzi scheme where he served as receiver. Other cases in which he has served as a fiduciary have been the subject of TV broadcasts including CNN's Anderson Cooper, CBS Evening News, and local news programs.
He has spoken on bankruptcy, receiver and fraud issues at conferences sponsored by the ABI, ACFE, AIRA, IAAR, INSOL, NABT, NACM, NAFER, NCBJ, TMA and other professional organizations.
Mr. Hays has thirty-five years of financial experience including twenty-five years managing bankruptcy and receivership cases and investigating fraudulent activity. He manages a firm of corporate financial consultants that specializes in turnarounds, workouts, asset recovery, forensic accounting, litigation support, and interim management. He is a Certified Turnaround Professional (“CTP”) and a Certified Insolvency and Restructuring Advisor (“CIRA”) and serves on the Board of Directors for the Association of Insolvency & Restructuring Advisors. He also serves as the President of the National Association of Federal Equity Receivers (“NAFER”).
Hugh Sawyer
Professional Experience
Since April 2017, Mr. Sawyer has served as the President and Chief Executive Officer of Regis Corporation, a publicly traded corporation that owns, franchises and operates beauty salons worldwide. Mr. Sawyer previously served as a managing director at Huron Consulting Group, beginning in January 2010, and led the Operational Improvement Service Line for Huron's Business Advisory Practice. He has more than 35 years of experience leading operational improvements, turnarounds, mergers and acquisitions and strategic transformations for both public and private companies across a diverse group of industries. While at Huron, he served as Interim President and CEO of JHT Holdings, Inc., a provider of specialized transportation and logistics services, from January 2010 to March 2012; as the Chief Administrative Officer of Fisker Automotive Inc. (now known as Fisker Inc.), a manufacturer of hybrid electric vehicles, from January 2013 to March 2013; as Chief Restructuring Officer of Fisker Automotive from March 2013 to October 2013; and as Interim President of Euramax International, Inc., a global manufacturer of building products, from February 2014 to August 2015. Including Regis, he has served as the president or chief executive officer of nine companies, including Wells Fargo Armored Service Corporation, The Cunningham Group, Inc., National Linen Service, Inc., Aegis Communications Group, Inc., Allied Holdings, Inc., and Legendary Holdings, Inc.
Board Service Mr. Sawyer serves on the board of Huron Consulting Group, Inc. and has served on the boards of numerous other companies, including Regis Corporation, JHT Holdings, Inc., Energy Future Competitive Holdings Company LLC and Texas Competitive Electric Holdings Company LLC from 2013 to October 2016, and Edison Mission Energy from July 2012 to April 2014, and thereafter on the Board of Managing Trustees of the EME Reorganization Trust until December 2016.
Individual Contributions Mr. Sawyer has a history of providing transformational leadership and support to companies in a broad range of industries, including consumer car rental, consumer retail, utilities, building materials, healthcare, transportation and logistics, equipment rental, security and guard services, graphic arts and printing, industrial laundry, CRM solutions and telecommunications, automotive OEM, automotive supply, commercial nursery operations, marine retail, real estate development, resort and hotel operations. Mr. Sawyer also has extensive governance background as a board member in businesses with sophisticated constituents facing complex circumstances, and will be able to bring this experience with him to the board.