In re Ionosphere Clubs, Inc., Bankruptcy No. 89 B 10448 (BRL)

• Citation: 113 BR 164
• Decision Date: 19 April 1990
• Docket Number: Bankruptcy No. 89 B 10448 (BRL),89 B 10449 (BRL).
• Parties: In re IONOSPHERE CLUBS, INC., and Eastern Air Lines, Inc., Debtors.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

113 B.R. 164 (1990)

In re IONOSPHERE CLUBS, INC., and Eastern Air Lines, Inc., Debtors.

Bankruptcy Nos. 89 B 10448 (BRL), 89 B 10449 (BRL).

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

April 19, 1990.

Weil, Gotshal & Manges, New York City by Bruce R. Zirinsky, Zack A. Clement, Deryck A. Palmer, Sharon Youdelman, Laura M. Sillins, Brian S. Rosen, for debtors.

Kramer, Levin, Nessen, Kamin & Frankel, New York City by Joel B. Zweibel, Adam Harris, for Creditors Committee.

Dickstein Shapiro & Morin by Samuel Stern, Hazel, Thomas, Fiske, Weiner, Beckhorn & Hanes, P.C., Washington, D.C. by Stanley J. Samorajczyk, Robert M. Marino, for Examiner.

Hughes Hubbard & Reed, New York City by Robert J. Sisk, for Texas Air Corp.

Cohen Weiss and Simon, New York City by Bruce H. Simon, Richard M. Seltzer, for ALPA.

Guerrieri, Edmond & James, P.C., Washington, D.C. by Joseph Guerrieri, Robert S. Clayman, for IAM.

O'Donnell & Schwartz, New York City by Carl Rachlin, for TWU.

Otto G. Obermaier, U.S. Atty., New York City by James Garrity, Jr., Asst. U.S. Atty., for Dept. of Transp.

Berlack, Israels & Liberman, New York City by Edward S. Weisfelner, David Strumwasser, for Preferred Shareholders Committee.

Carol Connor Flowe, Washington, D.C., Otterbourg, Steindler, Houston & Rosen, P.C., New York City by William M. Silverman, Enid Nagler Stuart, for Pension Ben. Guar. Corp.

Simpson Thatcher & Bartlett, New York City by Lillian E. Kraemer, for Airbus.

Zalkin, Rodin & Goodman, New York City by Henry L. Goodman, for Boeing Co.

Anderson Russell Kill & Olick, P.C., New York City by Roy Babitt, for Ad Hoc Committee of Bondholders.

Rogers & Wells, New York City by Richard S. Miller, for IBJ Schroder Bank & Trust Co Shanley & Fisher, P.C., New York City by Robert K. Malone, for Midlantic Nat. Bank.

Bruce H. Roswick, New York City, for First Fidelity Bank, N.A. as Collateral Trustee.

Gibson, Dunn & Crutcher, New York City by Peter C. Rockwell, for Nat. Westminster Bank, N.J. as Series A Trustee.

Clapp & Eisenberg, P.C., Newark, N.J. by Karen L. Gilman, for United Jersey Bank as Trustee Second Series Indenture.

Richard K. Helman, New York City, for The Port Authority of NY & NJ.

Riker, Danzig, Scherer & Hyland & Perretti, Morristown, N.J. by Rafel Perez, for First Fidelity Bank N.A. as Collateral Trustee.

Dow, Lohnes & Albertson, Washington, D.C. by David F. Bantleon, for Maryland Nat. Bank.

David I. Shapiro, Examiner.

Harold D. Jones, U.S. Trustee.

RULING ON MOTION BY CREDITORS' COMMITTEE FOR THE APPOINTMENT OF A CHAPTER 11 TRUSTEE

BURTON R. LIFLAND, Chief Judge.

BACKGROUND

On March 9, 1989 (the "Filing Date") Eastern Air Lines, Inc. and its affiliate Ionosphere Clubs, Inc. (the "Debtors" or "Eastern") each filed a voluntary petition for relief under chapter 11, title 11, United States Code (the "Code"). By order dated March 9, 1989, the cases were consolidated for procedural purposes only. Since the Filing Date, the Debtors have continued to operate their businesses as debtors-in-possession pursuant to Code §§ 1107 and 1108.

Approximately, 13 months after the Filing Date, the Official Committee of Unsecured Creditors of Eastern (the "Committee"), pursuant to Code § 1104, has moved this Court to appoint a Chapter 11 trustee to replace the debtor-in-possession, in order "to enhance the value of the estate" and proceed toward a "viable reorganization". Prior to this time, the Committee has had a very cooperative relationship with the Debtors. For example, on at least two separate occasions, in July 1989 and February 1990, the Committee authorized the issuance of press releases in support of the Debtors' management. In addition, the Debtors have obtained the use of $320 million of escrowed unencumbered cash since the Filing Date without objection from the Committee. Moreover, since the Filing Date, the Committee has also supported the Debtors' asset disposition program, proceeds of which have been used to fund Eastern's massive losses totaling over $1.2 billion.

At the end of March, the Committee lost all confidence in Eastern's management when Eastern announced to the Committee that it once again would have to renege on its previous agreement entered into six weeks earlier, and embodied in what has been referred to as the "Fifty-Cent" plan. Eastern reported to the Committee that its previous forecast had to be modified and that its losses in 1990 were now being estimated at $329.7 million, which is $184.4 million more than the $145.3 million that had been forecast in January. The Committee responded to Eastern's new assessment by demanding that Texas Air Corp. ("Texas Air"), as Eastern's parent, indemnify on a subordinated basis the continuing staggering losses of Eastern. It was only after Texas Air failed to guarantee such an indemnification that the Committee filed its motion to appoint a trustee.

The Committee asserts in its motion that a trustee is warranted in this instance because, inter alia, (1) Eastern's devastating, constantly expanding and unending losses are extremely damaging to unsecured creditors and therefore to the interests of the estate; (2) Texas Air and Eastern have demonstrated their inability to project the results of operations to the extent that the Committee has lost confidence in their stewardship of the business; and (3) Eastern and Texas Air have repeatedly reneged on their plan of reorganization agreements with the Committee, such that the Committee has no confidence in the ability or willingness of the Debtors and its common equity holder to adhere to basic understandings.

It should be noted that the Committee's motion differs from the motion for the appointment of a trustee filed by the Air Line Pilot's Association ("ALPA") several days after the commencement of this case. The ALPA motion was based on alleged pre-petition activity of the Debtors. In April 1989, this Court appointed an Examiner to investigate these allegations, and deferred consideration of ALPA's motion pending the report of the Examiner. On March 1, 1990, after an extensive investigation spanning the course of approximately eight months, the Examiner filed his report regarding the pre-petition transactions between the Debtors and Texas Air and its affiliates. The Examiner concluded that with respect to 12 of the 15 transactions reviewed, sufficient facts existed to warrant the assertion of colorable causes of action on the grounds that such transactions constituted fraudulent conveyances. The report valued those causes of action at between $285 and $403 million. Although Eastern and Texas Air executed a Memorandum of Understanding with the Examiner to settle all claims arising out of the pre-petition transactions, Texas Air and Eastern have vehemently denied any wrongdoing. The Committee's motion, however, is not framed to include these pre-petition activities as grounds for the appointment of a trustee. Instead, the Committee, recognizing that the settlement of these pre-petition activities may no longer exist in view of the aborted 50% plan, also includes as a ground for the appointment of a trustee the need to pursue the claims against Texas Air and others.

DISCUSSION

Chapter 11 of the Code is designed to allow the debtor-in-possession to retain management and control of the debtor's business operations unless a party in interest can prove that the appointment of a trustee is warranted. In re General Oil Distributors, Inc., 42 B.R. 402, 409 (Bankr. E.D.N.Y.1984); In re BAJ Corp., 42 B.R. 595, 597 (Bankr.D.Conn.1984); In re La Sherene, Inc., 3 B.R. 169, 174 (Bankr.N.D. Ga.1980). The appointment of a trustee in a chapter 11 case is an extraordinary remedy. In re William A. Smith Constr. Co., Inc., 77 B.R. 124, 126 (Bankr.N.D.Ohio 1987); In re Parker Grande Development, Inc., 64 B.R. 557, 560 (Bankr.S.D.Ind.1986); In re Anchorage Boat Sales, Inc., 2 C.B.C.2d 348, 361, 4 B.R. 635 (Bankr.E.D.N.Y. 1980). There is a strong presumption that the debtor should be permitted to remain in possession absent a showing of need for the appointment of a trustee. Committee of Dalkon Shield Claimants v. A.H. Robbins Co., Inc., 828 F.2d 239, 241 (4th Cir. 1987); In re Evans, 48 B.R. 46, 47 (Bankr. W.D.Tex.1985); In re Eichorn, 5 B.R. 755, 757 (Bankr.D.Mass.1980).

Section 1104(a) of the Code provides:

(a) At any time after the commencement of the case but before confirmation of a plan, on request of a party in interest or the United States trustee, and after notice and a hearing, the court shall order the appointment of a trustee —

(1) 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; or

(2) if such appointment is in the interest of creditors, any equity security holders, and other interests of the estate, without regard to the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor.

Although in this case a full four day evidentiary hearing was conducted, in considering a motion for the appointment of a trustee, a bankruptcy court is not required to conduct a full evidentiary hearing. In re Casco Bay Lines, Inc., 17 B.R. 946, 950 (1st Cir.B.A.P.1982). The party requesting the appointment of a trustee has the burden of proof in showing "cause". See, In re William A. Smith Constr. Co., Inc., 77 B.R. at 126; In re Cole, 66 B.R. 75, 76 (Bankr.E.D.Pa.1986); In re St. Louis Globe-Democrat, Inc., 63 B.R. 131, 138 (Bankr.E.D.Mo.1985). The evidence supporting the motion for the appointment of a trustee must be clear and convincing. Id.; In re Evans, 48 B.R. at 47; In re Tyler, 18 B.R. 574, 577 (Bankr.S. D.Fla.1982).

The language of § 1104(a)(1) of the Code represents Congressional recognition that some degree of...