In re Mercury Finance Co., 98 C 6358. Bankruptcy No. 98 B 20763.
| Decision Date | 21 October 1999 |
| Docket Number | No. 98 C 6358. Bankruptcy No. 98 B 20763.,98 C 6358. Bankruptcy No. 98 B 20763. |
| Parties | In re MERCURY FINANCE CO., Debtor. Ira Bodenstein, United States Trustee, Appellant, v. Robert Lentz, Arthur Kaplan, Alan Aron, and George Pontikes, Appellees. |
| Court | U.S. District Court — Northern District of Illinois |
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Sandra Rasnak, United States Trustee, Chicago, IL.
Lewis S. Rosenbloom, McDermott, Will, & Emery, Chicago, IL, for appellee.
This case turns on whether the bankruptcy court had jurisdiction to review the United States Trustee's decision to form a combined committee under 11 U.S.C. § 1102 consisting of both creditors and equity security holders and, if so, whether the bankruptcy court's orders regarding that committee which, among other things, dissolved it, were proper. For the following reasons, the decision of the bankruptcy court is affirmed.
Debtor Mercury Finance Company is a publicly traded holding company that is engaged, through its non-debtor operating subsidiaries, in the business of subprime automobile financing. Its primary assets consist of 37 operating subsidiaries which acquire installment sales finance contracts from automobile dealers and retail vendors, extend short term installment loans to consumers, and sell credit insurance and other related products. In 1997, Mercury Finance announced that its Chief Financial Officer had overstated its earnings for 1995 and 1996. Mercury Finance's shareholder value plunged more than $2 billion, and it was sued in state and federal court in Illinois and Delaware. Class action and derivative lawsuits seeking to recover losses arising from the purchase or sale of securities were consolidated in this district. In April of 1998, Magistrate Judge Edward Bobrick, who was conducting settlement conferences in the consolidated cases, designated an eight member settlement committee to represent all of the claimants in these cases for the purposes of settlement (the "Settlement Committee").
In July of 1998, some of Mercury Finance's creditors filed an involuntary Chapter 11 petition against it. Days later, Mercury Finance filed its own Chapter 11 voluntary petition. The bankruptcy court subsequently consolidated these cases. Appellant Ira Bodenstein, the United States Trustee for the Northern District of Illinois, then appointed two committees. First, he appointed a committee comprised of unsecured creditors pursuant to 11 U.S.C. § 1102(a)(1). The formation and composition of this committee is not at issue in this appeal.
Second, pursuant to 11 U.S.C. § 1102(a)(1), which allows United States Trustees to "appoint a committee of creditors holding unsecured claims" and such "additional committees of creditors or of equity security holders as the United States trustee deems appropriate," he appointed a committee in light of the acknowledged pre-petition fraud and questions as to Mercury Finance's value. This nine member committee mirrored the Settlement Committee and was comprised of: (1) five current equity holders, four of whom were current equity holders who represent litigants in the security fraud and shareholder derivative lawsuits (the "equity holders"); and (2) four past holders of equity who have claims based on the securities fraud litigation against Mercury Finance (the "security purchaser claimants"). The court will refer to this committee as either the "equity holders/security purchasers claimants committee" or the "combined committee." Under 11 U.S.C. § 510(b), all of the members of the combined committee will be treated as equity under any plan of reorganization.1
On July 29, 1998, Alan Aron, Arthur Kaplan, and Robert Lentz, current shareholders of Mercury Finance, presented an emergency motion seeking entry of an order directing the trustee to reconstitute membership of the equity committee. In essence, this motion challenged the composition of the combined committee. The bankruptcy court intimated that it did not have jurisdiction to grant this relief and granted leave to file an amended motion seeking what it characterized as the only available remedy—an additional committee.
On July 31, 1998, Aron, Kaplan, and Lentz, as well as George Pontikes, another Mercury Finance shareholder (all four of whom are the appellees in this case), filed an amended motion asking the bankruptcy court to remove all or some of the combined committee's members. In their motion, they contended that the security purchaser claimants cannot sit on an equity committee because they are not equity holders, since they do not currently hold any shares of stock. They also argued that the trustee abused his discretion when he appointed security purchaser claimants and equity holders who hold fewer shares than they do, in light of their stated interest in serving on the committee. Thus, the appellees asked the bankruptcy court to either: (1) order the trustee to remove the security purchaser claimants and the equity holders with fewer shares than the appellees from the combined committee and appoint persons eligible to serve under § 1102(b)(2) in their place; or (2) order the trustee to disband the combined committee and appoint a new committee in its place.
Over the opposition of the trustee, Mercury Finance, the unsecured creditors committee, and the combined committee, the bankruptcy court dissolved the combined committee.2See In re Mercury Finance Co., 224 B.R. 380 (Bankr.N.D.Ill. 1998). Specifically, the bankruptcy court held that, although the Bankruptcy Code does not grant it specific authority to review the composition of a committee or modify membership in a committee, it has inherent authority under 11 U.S.C. § 105 to review the trustee's decision to appoint the combined committee. Id. at 383-85. It then explained that it may modify or alter the composition of a committee when it does not adequately represent the parties-in-interest and that it is not limited to ordering appointment of an additional committee to address this situation. Id. Having determined that it had the authority to review the committee's composition, it then dissolved it, observing that, because there is no statutory authority for a blended committee consisting of creditors and equity holders, the trustee lacked the power to appoint such a committee under § 1102(a). Id. at 385-88. It subsequently denied the trustee's motion to reconsider, stating that 11 U.S.C. § 1102 does not provide for a combined committee of security purchaser claimants and equity holders. Id.
The bankruptcy court subsequently ordered the trustee to appoint two separate committees. The first represents the interests of current holders of Mercury Finance's common stock (the "official equity security holders committee" or the "equity committee"). The second represents the interests of the litigants in the security fraud and shareholder derivative lawsuits (the "litigants committee"). The trustee did not appeal from these orders and appointed these two new committees. The equity committee, which filed a brief pursuant to 11 U.S.C. § 1109(b), asserts that the orders appointing the new committees are final and cannot be attacked collaterally via an attack on the order dissolving the original committee. It also contends that the new committees have been making progress and that it is thus highly unlikely that any eligible entities would be willing to serve on a blended committee even if this court were to reinstate that committee. Thus, it suggests that this appeal is moot because this court cannot, in essence, put Humpty Dumpty back together again by granting the Trustee's requested relief and reforming the combined committee.
On the other hand, the trustee contends that: (1) the bankruptcy court lacked jurisdiction under 11 U.S.C. § 105 and Fed. R.Bankr.P. 2020 to review its decision to form the combined committee and to dissolve that committee; (2) the bankruptcy court erred when it found 11 U.S.C. § 510(b) does not automatically convert security purchaser's claims into equity interests for the purposes of 11 U.S.C. § 1102 and thus erroneously concluded that the security purchaser claimants were ineligible to serve on an equity committee; and (3) the bankruptcy court erred when it found that, even if the combined committee was a blended committee (i.e., that it had members who did not have equity interests), 11 U.S.C. § 1102(a)(1) allows formation of an additional committee consisting of both creditors and equity holders.
This appeal involves purely legal issues. Hence, this court will review the bankruptcy court's conclusions of law de novo. Fed.R.Bankr.Pro. 8013; Matter of UNR Indus., Inc., 986 F.2d 207, 208 (7th Cir.1993).
28 U.S.C. § 157(b)(1) gives bankruptcy judges the authority to hear and enter judgment in "all core proceedings arising under title 11, or arising in a case under title 11. . . ." In turn, 28 U.S.C. § 157(b)(2)(A) provides that matters concerning the administration of the estate are core proceedings. Pursuant to 28 U.S.C. § 158(a), which vests jurisdiction over appeals from final judgments, orders, and decrees of the bankruptcy courts in the federal district courts, this court has jurisdiction over this appeal from the bankruptcy court's final order disposing of a core proceeding.
"A case is moot if there is no possible relief which the court could order that would benefit the party seeking it." Matter of Envirodyne Industries, Inc., 29 F.3d 301, 303-04 (7th Cir.1994). Thus, where a court can grant even partial relief, a case is not moot. Id.; see also Matter of Turner, 156 F.3d 713, 716 (7th Cir.1998) (). Because this court could...
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