In re Bush Industries, Inc.

• Decision Date: 16 September 2004
• Docket Number: No. 04-12295 B.,04-12295 B.
• Citation: 315 B.R. 292
• Parties: In re BUSH INDUSTRIES, INC., Debtor.
• Court: U.S. Bankruptcy Court — Western District of New York

315 B.R. 292

In re BUSH INDUSTRIES, INC., Debtor.

No. 04-12295 B.

United States Bankruptcy Court, W.D. New York.

September 16, 2004.

COPYRIGHT MATERIAL OMITTED

Hodgson Russ LLP (Garry M. Graber, of counsel, Julia S. Kreher, of counsel, Stephen L. Yonaty, of counsel), Buffalo, NY, for Debtor.

Nixon Peabody LLP (William S. Thomas, Jr., of counsel, Gregory J. Mascitti, of counsel), Rochester, NY, for JP Morgan Chase Bank as Agent to the Debtor's Secured Lenders.

Akin Gump Strauss Hauer & Feld LLP (Michael S. Stamer, of counsel, Abid Qureshi, of counsel, Tess H. Autrey, of counsel), New York City, for DDJ Capital Management.

Kronish Lieb Weiner & Hellman LLP (John A. Morris, of counsel, Lawrence C. Gottlieb, of counsel, Eric J. Haber, of counsel, Scott J. Pashman, of counsel), New York City, for The Official Committee of Equity Security Holders.

CARL L. BUCKI, Bankruptcy Judge.

The officers and directors of a corporation owe a fiduciary obligation to shareholders. This obligation continues even in the context of bankruptcy, and demands an equality of treatment as among all owners of the company. The bankruptcy process allows no room for self-dealing by officers and directors of a publicly traded enterprise. In the instant case, where unsecured creditors are to paid in full, the central issue is whether a proposed plan violates these fundamental rights of shareholders.

In this chapter 11 case, the Official Committee of Equity Security Holders (the "Equity Committee") asks that this court deny confirmation of the debtor's plan of reorganization on three grounds. First, the committee asserts that the plan fails to satisfy the absolute priority rule as set forth in 11 U.S.C. § 1129(b). During four days of intense trial, the parties have presented markedly contrasting views of the fair value of the reorganized debtor. This value is critical to the issue of whether a proposed stock distribution will cause secured creditors to receive more than the outstanding balance on their claims. Second, the committee challenges a proposed grant of general releases. Noting the debtor's intention to provide a "golden parachute" for its principal officer, the committee thirdly asserts that the plan fails to satisfy the good faith requirement of 11 U.S.C. § 1129(a)(3).

Bush Industries, Inc., filed a petition for relief under chapter 11 of the Bankruptcy Code on March 31, 2004. From the beginning of this case, in motions filed with its petition, the debtor indicated that it had reached agreement with the majority of its secured creditors as to the terms of a reorganization plan. Pursuant to that agreement, the debtor filed a disclosure statement and plan on April 23, 2004. After a hearing on notice to all creditors, this court approved a Second Amended Disclosure Statement and scheduled a hearing to consider confirmation of the plan that is now the subject of dispute.

In its disclosure statement, the debtor describes itself as "a diversified global furniture manufacturer and supplier of surface technologies." With headquarters in Jamestown, New York, Bush Industries has as its core business the manufacture of ready to assemble furniture. After witnessing a steady growth in revenue during the 1990's, the management of Bush Industries implemented strategies that it hoped would assure continued growth for the company. These strategies included the acquisition of Rohr Gruppe, Inc., a German furniture manufacturer, and the Color Works, Inc., a company that applies decorative finishes to such surfaces as the face pieces of cellular telephones. With expectations of continued growth, Bush Industries invested $30 million in the acquisition of new equipment during the first quarter of 2000. Additionally, during the second quarter of 2000, the debtor increased its inventory by approximately $30 million. Then, during the later part of 2000, the economy began to weaken and Bush Industries started to encounter serious financial difficulties.

In response to the company's financial problems, management implemented a non-bankruptcy restructuring plan. It closed three retail outlets and a manufacturing facility in St. Paul, Virginia. It eliminated unprofitable product lines. Despite these efforts, the company continued to incur losses. Consequently, in July 2003, the company retained FTI Consulting, Inc., a crisis management and restructuring consulting firm. Although Bush Industries adopted additional cost cutting measures and management changes, deteriorating financial performance caused covenant defaults under the debtor's credit facility during the third quarter of 2003. Meanwhile, the debtor failed in attempts to raise capital through a sale of its German subsidiary or through a new facility of mezzanine financing. Then in February 2004, the company's secured creditors denied a request for an eighteen month extension of its outstanding credit facility. On March 29, 2004, after what the debtor describes as "protracted negotiations", Bush Industries signed a Lock Up and Voting Agreement with seven of the eight participants in the pre-petition credit facility. Two days later, pursuant to that agreement, Bush Industries filed its petition for relief under chapter 11.

In its bankruptcy schedules, Bush Industries lists obligations totaling $180 million. Of this amount, as of the bankruptcy filing, the debtor owed $158 million to eight secured creditors under the terms of a certain Credit and Guarantee Agreement dated as of July 26, 1997 (the "Pre-Petition Credit Facility"). Seven of these eight creditors then became parties to the Lock Up and Voting Agreement. Pursuant to the Lock Up and Voting Agreement, the seven participating creditors promised post-petition financing to the debtor. In addition, the debtor agreed to propose and the participating creditors agreed to support a reorganization plan with terms as described in the Lock Up and Voting Agreement. The debtor's Second Amended Plan of Reorganization essentially incorporates these terms.

In its plan of reorganization, the debtor proposes full payment of all creditors other than the members of class 3, which consists of the eight lenders under the Pre-Petition Credit Facility. In exchange for their secured claims of more than $158 million, the class 3 creditors will receive a proportionate interest in each of two secured notes, together with a pro-rata distribution of new common stock in the reorganized debtor. The two secured notes are respectively in the amounts of $50 million and $15 million. The plan also requires the cancellation of all pre-petition stock of Bush Industries, Inc. Upon issuance of the new common stock, therefore, the members of class 3 will own the reorganized debtor. Further, the plan proposes to provide releases to a number of individuals and entities. Under the plan, the debtor will also continue to employ Paul S. Bush, who had resigned as Chairman, Chief Executive Officer and director of the debtor and its subsidiaries as of March 29, 2004.

Although a party to the Pre-Petition Credit Facility, HSBC Bank had declined to sign the Lock Up and Voting Agreement and had filed written objections to the debtor's plan. Just hours before the hearing on confirmation, however, HSBC sold its interest at a discount to other members of Class 3. As a consequence, at confirmation, the holders of class 3 claims voted unanimously to support the Second Amended Plan. Proposing to pay the other claims in full, the plan did not impair any other class of creditors. Earlier in these proceedings, this court had approved the appointment of the Equity Committee. In view of the plan's proposal to cancel the interests of the pre-petition stockholders, the Equity Committee has presented the only continuing objections to confirmation.

Standard of Proof

In chapter 11, this court can confirm only those plans which satisfy the requirements of 11 U.S.C. § 1129. The Equity Committee contends that the proponent of the plan carries a burden to demonstrate these requirements by evidence that is clear and convincing. Contesting this standard, the debtor asserts that it carries a burden of proof by only a preponderance of evidence. Although the Court of Appeals for this circuit has yet to address this issue definitively, I join the majority view that would mandate the lesser standard of proof by a preponderance of evidence. See Matter of Briscoe Enterprises, Ltd., II, 994 F.2d 1160 (5th Cir. 1993), In re Cellular Info. Sys., 171 B.R. 926, 937 (Bankr.S.D.N.Y.1994); In re 8315 Fourth Ave. Corp., 172 B.R. 725 (Bankr. E.D.N.Y.1994), 7 ALAN N. RESNICK & HENRY J. SOMMER, Collier on Bankruptcy ¶ 1129.024(15th ed. rev.2004).

The text of section 1129 does not mandate any extraordinary standard of proof. Impliedly, therefore, this court should apply the standard that is generally applicable to civil disputes. In a different bankruptcy context, the Supreme Court has identified this standard as proof by a preponderance of the evidence. "Because the preponderance-of-the-evidence standard results in a roughly equal allocation of the risk of error between litigants, we presume that this standard is applicable in civil actions between private litigants unless `particularly important individual interests or rights are at stake.'" Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991), quoting Herman & MacLean v. Huddleston, 459 U.S. 375, 389-390, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983).

An equal allocation of the risk of error is particularly appropriate in determining value for purposes of plan confirmation. Both creditors and stockholders share the same interest in the outcome of a favorable valuation. An inappropriately high valuation will deny to creditors the right to assets without allocation for the interest of equity. On the other hand, an inappropriately low valuation will deny to equity the right to assets after allocation for the interest of creditors. From the competing...