In re City of Detroit

• Decision Date: 28 February 2014
• Docket Number: No. 13–53846.,13–53846.
• Citation: 519 B.R. 673
• Court: U.S. Bankruptcy Court — Eastern District of Michigan
• Parties: In re CITY OF DETROIT, MICHIGAN, Debtor.

519 B.R. 673

In re CITY OF DETROIT, MICHIGAN, Debtor.

No. 13–53846.

United States Bankruptcy Court, E.D. Michigan, Southern Division.

Signed Feb. 28, 2014.

Bruce Bennett, Los Angeles, CA, Judy B. Calton, Honigman Miller Schwartz & Cohn LLP, Marc N. Swanson, Miller Canfield Paddock and Stone, P.L.C., Eric D. Carlson, Tamar Dolcourt, Jonathan S. Green, Stephen S. Laplante, John A. Simon, Timothy A. Fusco, Eric B. Gaabo, Detroit, MI, David Gilbert Heiman, Cleveland, OH, Deborah Kovsky–Apap, Pepper Hamilton LLP, Robert S. Hertzberg, Kay Standridge Kress, Southfield, MI, Heather Lennox, New York, NY, for Debtor.

Order Granting the City's Motion to Vacate the Appointment of the Official Committee of Unsecured Creditors

STEVEN RHODES, Bankruptcy Judge.

This matter is before the Court on the City of Detroit's Motion for Entry of an Order Vacating the Appointment of the Official Committee of Unsecured Creditors. (Dkt. # 2626) The United States Trustee filed an objection to the motion (Dkt. # 2688), as did the Committee itself. (Dkt. # 2687) The Court heard oral argument on the motion on February 19, 2014, and took the matter under advisement.

For the reasons stated below, the Court concludes that 11 U.S.C. § 1102(a)(1), on which the U.S. Trustee relied in appointing the Committee, does not apply in a chapter 9 case. In the alternative, the Court concludes that it has the discretion under 11 U.S.C. § 105(a) to disband the Committee. Finally, the Court concludes that because of the lack of value of the Committee in this case and the likely substantial costs for the fees of the professionals of the Committee, that discretion should be exercised in this case. Accordingly, the motion to vacate the appointment of the Committee is granted.

I. Background

The U.S. Trustee appointed the Official Committee of Unsecured Creditors (“the Committee”) on December 23, 2013, and filed notice of the appointment with this Court the same day. (Dkt. # 2290) The notice states that in appointing the Committee, the U.S. Trustee acted “pursuant to §§ 901 and 1102(a)(1) and (b) of the Bankruptcy Code.” The notice identifies the following members of the Committee: 1) Financial Guaranty Insurance Company, which insures some of the certificates of participation the City issued in 2005 and 2006, 2) the Police and Fire Retirement System of the City of Detroit, 3) the General Retirement System of the City of Detroit, 4) Wilmington Trust Company, which serves as the trustee for holders of the certificates of participation, and 5) Jessie Payne, an individual tort claimant.

The issues raised in the motion and the objections concern the U.S. Trustee's obligations under 11 U.S.C. § 1102(a) in this chapter 9 case, and the Court's authority to disband an official committee appointed by the U.S. Trustee.

Section 1102(a) provides:

(a)(1) Except as provided in paragraph (3), as soon as practicable after the order for relief under chapter 11 of this title, the United States trustee shall appoint a committee of creditors holding unsecured claims and may appoint additional committees of creditors or of equity security holders as the United States trustee deems appropriate.

(2) On request of a party in interest, the court may order the appointment of additional committees of creditors or of equity security holders if necessary to assure adequate representation of creditors or of equity security holders. The United States trustee shall appoint any such committee.

(3) On request of a party in interest in a case in which the debtor is a small business debtor and for cause, the court may order that a committee of creditors not be appointed.

(4) On request of a party in interest and after notice and a hearing, the court may order the United States trustee to change the membership of a committee appointed under this subsection, if the court determines that the change is necessary to ensure adequate representation of creditors or equity security holders. The court may order the United States trustee to increase the number of members of a committee to include a creditor that is a small business concern ... if the court determines that the creditor holds claims (of the kind represented by the committee) the aggregate of which, in comparison to the annual gross revenue of that creditor, is disproportionately large.

11 U.S.C. § 1102(a).

Section 1102 is incorporated into chapter 9 by 11 U.S.C. § 901(a). See also 11 U.S.C. § 103(f) (“Except as otherwise provided in section 901 of this title, only chapters 1 and 9 of this title apply in a case under such chapter 9.”). Section 901 does not exclude any particular subsections of § 1102. See 11 U.S.C. § 901(a).

The U.S. Trustee and the Committee assert that because § 901 incorporates § 1102 into chapter 9 without excluding any particular subsections of § 1102, and the language of § 1102(a)(1) is mandatory (“the United States trustee shall appoint ...”), the U.S. Trustee was statutorily required to appoint the Committee after this Court entered the Order for Relief Under Chapter 9 of the Bankruptcy Code. (Dkt. # 1946)

The City disputes this position, arguing that the U.S. Trustee's authority to appoint a committee under § 1102(a)(1) is discretionary in chapter 9. Moreover, the City argues, the U.S. Trustee abused its discretion by appointing the Committee because the Committee would add little value to the case, particularly given the advanced stage of the proceedings.

As a corollary issue, the parties also dispute whether this Court has authority under 11 U.S.C. § 105 to order the disbandment of the Committee.

II. The U.S. Trustee's Standing to Object to the City's Motion

A preliminary matter is the U.S. Trustee's standing to object to the City's motion. At the hearing on the motion, the Court raised this issue with counsel for the U.S. Trustee, who responded that 11 U.S.C. § 307 gives the U.S. Trustee standing to object. That section provides, “The United States trustee may raise and may appear and be heard on any issue in any case or proceeding under this title but may not file a plan pursuant to section 1121(c) of this title.”

The Court concludes that § 307 is not incorporated into chapter 9. It is not on the list of sections in the bankruptcy code that § 901(a) incorporates into chapter 9. Moreover, 11 U.S.C. § 103(f) specifically states, “Except as provided in section 901 of this title, only chapters 1 and 9 of this title apply in a case under such chapter 9.” 11 U.S.C. § 103(f). Thus, despite the sweeping language of § 307, the Court concludes that §§ 103(f) and 901(a) establish that the U.S. Trustee has no statutory standing in chapter 9 cases.

Nevertheless, the Court recognizes that as an administrative agency, the U.S. Trustee has a substantial interest in defending its own actions in this case when parties to the case challenge those actions. The Court concludes, therefore, that the U.S. Trustee does have standing to object to the City's motion. The U.S. Trustee does not, however, have general standing under 11 U.S.C. § 307 to “raise and appear and be heard on any issue” in this case.

III. Whether 11 U.S.C. § 1102(a)(1) Is Applicable in a Chapter 9 Case

Turning to the substantive issues, the Court concludes that 11 U.S.C. § 1102(a)(1) is not applicable in a chapter 9 case. In so determining, the Court relies on the inclusion of the phrase in subsection (a)(1), “as soon as practicable after the order for relief under chapter 11 of this title.” This language compels the conclusion that § 1102(a)(1) applies only in chapter 11 cases. Because no “order for relief under chapter 11 of this title” has been (or will be) entered in a chapter 9 case, subsection (a)(1) simply does not apply.

To interpret the limiting phrase any other way would be to read it out of the statute. This is an unacceptable result. See Duncan v. Walker, 533 U.S. 167, 174, 121 S.Ct. 2120, 150 L.Ed.2d 251 (2001) (quoting United States v. Menasche, 348 U.S. 528, 538–39, 75 S.Ct. 513, 99 L.Ed. 615 (1955) ) (“It is our duty ‘to give effect, if possible, to every clause and word of a statute.’ ”); see also id. (quoting Market Co. v. Hoffman, 101 U.S. 112, 115, 25 L.Ed. 782 (1879) ) (“As early as in Bacon's Abridgment, sect. 2, it was said that ‘a statute ought, upon the whole, to be so construed that, if it can be prevented, no clause, sentence, or word shall be superfluous, void, or insignificant.’ ”).

The Court concludes that this is true for both the “mandatory” part of subsection (a)(1) (“the United States trustee shall appoint a committee of creditors holding unsecured claims”) as well as the “discretionary” part of subsection (a)(1) (“and may appoint additional committees of creditors or of equity security holders as the United States trustee deems appropriate”) (emphasis added). In other words, the limiting phrase applies to the entirety of subsection (a)(1) that follows the limiting phrase.

The fact that § 901(a) incorporates the entirety of § 1102 does not compel a different result. Other subsections of § 1102, though ostensibly incorporated by § 901, also clearly do not apply in a chapter 9 case. For example, § 1102(a)(3), which allows the court to order that a committee not be appointed when the debtor is a “small business debtor,” does not apply in a chapter 9 case. A chapter 9 debtor is not a “small business debtor” as that term is defined by 11 U.S.C. § 101(51D) because the statutory definition is limited to “a person engaged in commercial or business activities.”

Similarly, § 1102(b)(2) does not apply in a chapter 9 case. That section provides, “A committee of equity security holders appointed under subsection (a)(2) of this section shall ordinarily consist of the persons, willing to serve, that hold the seven largest amounts of equity securities of the debtor of the kinds represented on such committee.” Because a municipality does not have equity security holders, the provisions of § 1102 that refer to equity security holders also do not apply in chapter 9. See also ...