In re Nelco Ltd., Bankruptcy No. 96-31500-T.
| Decision Date | 10 April 1997 |
| Docket Number | Bankruptcy No. 96-31500-T. |
| Court | U.S. Bankruptcy Court — Eastern District of Virginia |
| Parties | In re NELCO LTD., Chapter 11 Debtor-In-Possession. |
James K. Cluverius, Little, Parsley & Cluverius, P.C., Richmond, VA, for The Long Term Credit Bank of Japan, Ltd. and Creditanstalt Corporate Finance, Inc.
Miles Siegel, Simpson, Thacher & Bartlett, New York City, for The Long Term Credit Bank of Japan, Ltd.
Peter Feldman, Otterbourg, Steindler, Houston & Rosen, P.C., New York City, for Creditanstalt Corporate Finance, Inc.
Malcolm M. Mitchell, Jr., Murphy, McGettigan, Richards & West, Alexandria, VA, for CoreStates Bank, N.A.
Paul K. Campsen, Dennis T. Lewandowski, Kaufman & Canoles, P.C., Norfolk, VA, for Official Committee of Unsecured Creditors of Nelco Ltd.
Frank J. Santoro, Jane B. Wrightson, Marcus, Santoro & Kozak, P.C., Portsmouth, VA, for Nelco Ltd.
In this chapter 11 case, three bank creditors1 and the unsecured creditors' committee filed separate motions to appoint a trustee. In the alternative the banks' motion requests the conversion of the case to a chapter 7.
Hearing on the motions was held on November 15, 1996, at which the court heard testimony and extensive argument. At the conclusion of the hearing the court stated that the evidence presented did not warrant the appointment of a trustee. The alternative motion to convert the case was taken under advisement.
For the reasons stated in this opinion the court will order this case converted to a case under chapter 7.
Debtor Nelco Ltd. operated a successful computer leasing business until March 1996, when its management learned that a large number of Nelco's supposed leases were fraudulent and worthless.
The fraudulent leases, described throughout this bankruptcy case as the "stealth leases", represented in excess of $300,000,000.00 in lease financing debt, which had been funded by several banks. The fraud was perpetrated primarily by a former employee of the Philip Morris Companies, Edward J. Reiners. Both Nelco and the banks had believed the leases covered computer equipment used by a Philip Morris entity and that payment of the leases was an obligation of Philip Morris. As it turned out there were no computers, and there was no evidence before the Court that Philip Morris was involved.
With the collapse of a significant portion of its assets, Nelco filed this chapter 11 case on March 25, 1996. Nelco's principal and its counsel originally had hoped to salvage the company's business. However, it soon became apparent that Nelco would have to liquidate its remaining assets, comprised mostly of computer leases.
An unsecured creditors' committee has been a strong presence in this case as have the defrauded banks. From the outset, these banks, through counsel, have indicated some degree of distrust of Richard Nelson, based upon his prior association with the individual who committed the fraud. However, during several evidentiary hearings, including that on the instant motions, no evidence implicating Nelson in the fraud has been presented. Nelson himself has emphatically denied any involvement, pointing out that he and his company have also been victimized.
Another thread which has run throughout this case has been the specter of conflict between Nelson, the individual stockholder of Nelco, and Nelco itself. The nature of this conflict is described by this court in two opinions entered on August 13, 1996, and September 24, 1996, in which the court ruled that because of their conflicts between Nelson and Nelco, Nelson's personal attorneys could not serve as Nelco's special counsel in the chapter 11 case.
The instant motions for the appointment of a trustee (or conversion) are but another phase of the conflict between the banks and Richard Nelson, following the court's disqualification of Nelson's counsel from any Nelco representation. Thus, by the appointment of a trustee, movants seek finally to remove Nelson from any decision making position in the bankruptcy case.
In the administration of the chapter 11 case, Nelco and its bankruptcy counsel have forcefully and capably administered and liquidated Nelco's remaining leases and other assets. The creditors' committee and the banks cooperated with Nelco in the sale of its leases.
Outside the bankruptcy case, a forfeiture action is pending in United States District Court which involves the substantial sums recovered by the government from the perpetrators of the lease fraud. Among those competing for these funds are the banks, Nelson and Nelco.
Although Nelco's assets have been substantially liquidated, its counsel has stated that a number of matters remain to be done in the administration of the case. These include:
Conclusion of Law
11 U.S.C. § 1104(a).
At the conclusion of the hearing on the motions, I indicated from the bench that a trustee would not be appointed. The movants' evidence failed to prove "fraud, dishonesty, incompetence, or gross mismanagement," and therefore appointment of a trustee under § 1104(a)(1) is not warranted. I decline to order the appointment of a trustee under § 1104(a)(2) because this would serve no better purpose than the conversion of the case to a chapter 7.
As an alternative to the appointment of a trustee the bank movants request the court to convert this case to a chapter 7 case pursuant to 11 U.S.C. § 1112(b), which provides that the court may convert a chapter 11 case to a chapter 7 case "for cause,...
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