In re JNL FUNDING CORP.

• Decision Date: 28 October 2010
• Docket Number: No. 10-73724-AST.,10-73724-AST.
• Citation: 438 B.R. 356
• Parties: In re JNL FUNDING CORP., Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of New York

438 B.R. 356

In re JNL FUNDING CORP., Debtor.

No. 10-73724-AST.

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

Oct. 28, 2010.

Scott Mandelup, Esq., Anthony F. Giuliano, Esq., Pryor and Mandelup, Westbury, NY, for Debtor.

Richard G. Gertler, Esq., Thaler & Gertler, East Meadow, NY, for Official Committee of Unsecured Creditors.

Steven E. Fox, Esq., Maura I. Russell, Esq., James Treece, Esq., Epstein Becker & Green, PC, New York, NY, for Textron Financial Corporation.

MEMORANDUM OPINION DENYING MOTION TO DISBAND CREDITORS COMMITTEE

ALAN S. TRUST, Bankruptcy Judge.

Issues Before the Court and Summary of Ruling

Pending before this Court is the request of the purported secured lender to Debtor to disband the Official Committee of Unsecured Creditors. For the reasons herein, this request is denied.

Jurisdiction

This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A), (O), and 1334(b), and the Standing Order of Reference in effect in the Eastern District of New York.

Findings of Fact and Conclusions of Law

This opinion constitutes the Court's findings of fact and conclusions of law.

Procedural Background

On May 14, 2010 (the “Petition Date”), Debtor, JNL Funding Corp. (“JNL” or “Debtor”) filed a petition for relief pursuant to Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. § 101, et seq. (the “Bankruptcy Code”). Also on the Petition Date, Debtor's President and sole voting shareholder, Joseph Forgione, filed his own voluntary petition, which has been assigned case number 8-10-73726(AST) (the “Individual Case”).

Debtor is a “hard money” lender, primarily making first mortgage loans and construction loans for single family and multi-family residential real properties. [Forgione Affidavit, dkt item ¹ 17] Debtor's loans typically are made to real estate investors seeking to purchase and renovate properties for investment purposes. Most of Debtor's loans are made to repeat customers who have multiple loans from Debtor at any given time. Debtor's recent loans typically bear interest at the rate of 14% per annum, and Debtor typically receives four (4.0) percentage points for originating the loan. Debtor was incorporated in 2002, prior to which time Mr. Forgione operated a similar business through a d/b/a he called JNL Funding (the “DBA”). ²

Prior to the Petition Date, Textron Financial Corporation (“TFC”) as lender, and Debtor, as borrower, had entered into a Loan and Security Loan Agreement dated as of August 18, 2006, under which TFC agreed to and did make certain revolving loans and other financial accommodations available to Debtor (the “Agreement”). The Agreement was subsequently amended to include TD Bank North (“TD”) as a participant lender (as amended, the “Loan Agreement” and collectively, the “Lenders”). Prior to the Petition Date, TFC announced its decision to discontinue lending to borrowers in the type of business conducted by Debtor.

On the Petition Date, Debtor filed a list of its 20 largest secured creditors, as required by Rule 1007(d) of the Federal Rules of Bankruptcy Procedure (the “20 Largest List”). [dkt item 1]

Also on the Petition Date, in the Individual Case, Mr. Forgione filed a list of his twenty largest unsecured creditors, also as required by Rule 1007(d) of the Federal Rules of Bankruptcy Procedure (the “Individual 20 Largest List”). [Ind. dkt item 1]

Shortly after the Petition Date, on May 17, 2010, the Office of the United States Trustee (the “UST”) mailed out letters by which it solicited membership on an official committee of unsecured creditors for Debtor. This solicitation was based on Debtor's 20 Largest List. ³ The UST directed that responses were due by June 1, 2010.

On June 8, 2010, the UST appointed an Official Committee of Unsecured Creditors (“Committee”) in Debtor's case, pursuant to Section 1102(a)(1). [dkt item 30] The Committee is comprised of: Dr. Gary Dalto; Daniel W. DeLuca; Russell Johnson; William Perman; and John and Eleanor Weigel (individually, a “Member” and collectively, the “Members”). [dkt item 30] At the time of the appointment, each of the Members was listed on Debtor's 20 Largest List as the holder of a “contingent” claim in a specified amount.

On June 10, 2010, Mr. Forgione filed his Individual Schedule F-Creditors Holding Unsecured Nonpriority Claims. [Ind. dkt item 10] Each Member of the Committee is listed on Mr. Forgione's Schedule F as the holder of a “contingent” claim, and the claim is listed as a “loan.”

On June 11, 2010, Debtor filed its Amended Schedule F-Creditors Holding Unsecured Nonpriority Claims. [dkt item 34] Each Member of the Committee is listed on the Debtor's Schedule F as the holder of a “contingent” claim, and the claim is listed as an “investor.”

On June 22, 2010, this Court entered an Order authorizing the Committee's retention of Thaler & Gertler, LLP as counsel. [dkt item 40] On July 1, 2010, TFC filed a motion to disband the Committee (the “Committee Motion”). [dkt item 57]

On July 1, 2010, this Court entered an Order authorizing the Committee's retention of Marcum LLP as accountants. [dkt item 59]

On July 13, 2010, pursuant to Rule 3003(c)(3) of the Federal Rules of Bankruptcy Procedure (“Bankruptcy Rule”), and E.D.N.Y. Administrative Order No. 556, ⁴ this Court entered an Order establishing September 21, 2010, as the bar date for the filing of claims against Debtor which arose prior to the Petition Date. [dkt item 71]

On August 11, 2010, this Court entered a Scheduling Order setting a trial on the Committee Motion for August 25, 2010. [dkt item 109]

On August 12, 2010, both the Committee and the UST filed objections to the Committee Motion. [dkt items 111, 112]

On August 25, 2010, this Court conducted the trial on the Committee Motion.

As of August 25, 2010, every Committee member had filed unsecured Proofs of Claim in Debtor's case, as follows: Gary Dalto, claim number 73, filed on August 25, 2010, in the amount of $1,050,000; Daniel W. DeLuca, claim number 1, filed on May 21, 2010, in the amount of $1,006,667; Russell E. Johnson, claim number 71, filed on August 6, 2010, in the amount of $750,000; William and Eileen Perman, claim number 72, filed on August 16, 2010, in the amount of $2,000,000; and John and Eleanor Weigel, claim number 56, filed on July 15, 2010, in the amount of $830,000. As of August 25, 2010, no objections had been filed to any of the Committee Member claims.

Evidence at the trial included exhibits introduced by TFC, the Committee, and the UST, as well as testimony from Mr. Forgione, and Committee member Mr. Weigel. The documentary evidence conclusively established that no member of the Committee held a promissory note or guaranty executed by Debtor, and that each held a promissory note personally executed by Mr. Forgione. Further, the trial evidence was clear that each Committee Member was listed in Debtor's Schedules as an investor, while being listed in the Schedules in the Individual Case as a lender, and in each instance for the same amount. Finally, the trial evidence was clear that each Committee Member is similarly situated to a number of the other persons listed on the 20 Largest List in Debtor's case and the 20 Largest List in the Individual Case; each such person is listed as a creditor in both cases, yet holding only a promissory note from Mr. Forgione personally (collectively, the “Investors”).

TFC asserts that no Committee Member holds an allowable claim against Debtor, but, instead, may hold a claim only in the Individual Case. The Committee asserts that various liability theories exist under which Debtor is or may be liable to the Committee Members and the Investors. All parties recognize that the issues of whether the Committee Members hold allowable claims against Debtor extend beyond the Members of the Committee to the similarly situated Investors.

TFC's challenge to the Committee formation is not a claim of a procedural defect in the manner by which the Committee was appointed. TFC has not asked this Court to direct the UST to appoint another committee of unsecured creditors or direct the UST to appoint additional members to this Committee; rather, TFC's sole challenge is its assertion that no Member holds an allowable claim against Debtor and, therefore, the Committee should be disbanded.

Analysis

The threshold issue for this Court is the standard of review to be applied to consider the actions of the UST in appointing the Committee Members. That is, whether review of the UST's appointment of creditors committee members is conducted under an arbitrary and capricious standard, an abuse of discretion standard, a clearly erroneous standard, or a de novo review. The ultimate issue is whether the UST acted in derogation of its authority in appointing the Members.

Standard of Review

Despite limited case law on this issue, the majority of courts holds that the bankruptcy court has the inherent power, as well as the statutory authority under Section 105(a), to review acts of the UST, under an “arbitrary and capricious” or “abuse of discretion” standard of review. See, e.g., In re Mercury Fin. Co., 240 B.R. 270 (N.D.Ill.1999) (internal citations omitted); In re Barney's Inc., 197 B.R. 431, 438 (Bankr.S.D.N.Y.1996) (holding that the court reviews the UST's appointment of a committee under an arbitrary and capricious standard).

As noted in Barney's, the arbitrary and capricious standard is appropriate because appointment of a creditors committee is an administrative function, not a judicial function:

The bankruptcy court formerly was authorized to change the membership or size of a statutory committee if it determined that the existing membership was not representative of the different kinds of claims or interests to be represented. See 11 U.S.C. § 1102(c) (repealed). Subsection (c) was repealed in 1986 pursuant to the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986, Pub.L. No. 99-554,...