In re ShoreBank Corp.

• Decision Date: 12 March 2012
• Docket Number: No. 12 B 581.,12 B 581.
• Citation: 467 B.R. 156,56 Bankr.Ct.Dec. 74
• Parties: In re The SHOREBANK CORP., et al., Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

467 B.R. 156

56 Bankr.Ct.Dec. 74

In re The SHOREBANK CORP., et al., Debtors.

No. 12 B 581.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

March 12, 2012.

George N. Panagakis, Justin M. Winerman, Skadden Arps Slate Meagher & Flom LLP, Chicago, IL, Attorneys for debtors The ShoreBank Corp., et al.

Richard S. Lauter, Freeborn & Peters LLP, Chicago, IL, Attorney for Jamil Moore.

Elizabeth E. Richert, The Coleman Law Firm, Chicago, IL, Attorney for Mary Houghton and Ron Gryzwinski.Lauren Newman, Thompson Coburn LLP, Chicago, IL, Attorney for Todd Brown.Mark F. Hebbeln, Derek L. Wright, Foley & Lardner LLP, Chicago, IL, Attorneys for the Official Committee of Unsecured Creditors.Alan P. Solow, DLA Piper LLP, Chicago, IL, Attorney for the F.D.I.C. as Receiver.Roman L. Sukley, Office of the U.S. Trustee, Chicago, IL, Attorney for Patrick S. Layng, U.S. Trustee.

MEMORANDUM OPINION

A. BENJAMIN GOLDGAR, Bankruptcy Judge.

This matter is before the court for ruling on the emergency motion of Jamil Moore, Ron Gryzwinski, and Mary Houghton (“the movants”) to direct the U.S. Trustee to reconstitute the unsecured creditors committee or alternatively for other relief. For the following reasons, the motion will be denied.

1. Facts

The relevant facts, few and undisputed, are drawn from the parties' papers and from the debtors' proposed plan and disclosure statement. They are also drawn, to a very limited extent and mostly for procedural details, from the court's docket and the transcript of the March 7, 2012 argument.

These jointly administered chapter 11 cases were filed on January 9, 2012. Just three weeks later, the debtors filed a disclosure statement and proposed a liquidating plan. The plan calls for, among other things, the establishment of a liquidation trust and appointment of a trust administrator. No date has been set for confirmation of the plan, but the debtors' stated intention has always been for these cases to move as quickly as possible to confirmation. The immediate post-petition filing of the disclosure statement and plan suggests the debtors mean what they say.

On February 15, 2012, the U.S. Trustee held a meeting to form an official committee of unsecured creditors. According to the movants, six unsecured creditors expressed interest in serving on the committee. Three are the movants themselves. Gryzwinski is a former director of debtor ShoreBank Corporation. Houghton is a former officer and director. Moore is a personal injury claimant with a claim against another of the debtors. Of the other three interested creditors, Todd Brown is also a former director. The remaining two, Bank of New York Mellon and The Wilmington Trust Company, are trust preferred security claimants (“TruPS creditors”). The securities they hold are subordinated notes.

The plan proposes several classes of unsecured creditors. Senior note holders are placed in Class 4. Gryzwinski, Houghton, Moore, and Brown are general unsecured creditors that the proposed plan places in Class 5. The TruPS creditors are placed in Class 6. The plan also proposes to create a liquidation trust on confirmation. Under the plan, senior note holders will receive their pro rata share of the liquidation trust as if classes 4, 5, and 6 were a single class, as well as their pro rata share of certain interests that but for the senior note holders' rights would be paid to the TruPS creditors. The senior note holders are expected to be paid 78% of their claims. General unsecured creditors will receive their pro rata share of the liquidation trust as if classes 4, 5, and 6 were a single class. Their expected recovery is 19%. The TruPS creditors will also receive their pro rata share as if classes 4, 5 and 6 were a single class, but only if the claimants in Class 4—the senior note holders—are paid in full. The expected recovery of the TruPS creditors is zero.

After the February 15 meeting, the U.S. Trustee decided to form a three-member committee consisting of Brown and the two TruPS creditors. After the meeting, however, and before the U.S. Trustee could give formal notice of the committee's formation, Brown resigned. According to the movants (and according to Brown's counsel), he became concerned about serving on a committee of which TruPS creditors constituted a majority.

Although no committee had been formed, on February 29, 2012, the movants filed the motion now before the court in which they complain of the committee's makeup and seek to have the court reconstitute it. The motion expressed the same concerns that apparently caused Brown to resign, namely that the TruPS creditors dominate the committee. The movants contend that the structure of the plan—under which the TruPS creditors only get paid after the senior note holders are paid in full—gives the committee an incentive to act primarily in the TruPS creditors' economic interest. That interest would involve pursuing “high-risk strategies that run the risk of depleting the estates of precious resources because it is the only way [the TruPS creditors] could possibly receive any recovery on their claims.” (Mot. at 2 (emphasis in original)). Since no committee had officially been formed, however, and since it is difficult to reconstitute a committee that does not yet exist, on the March 1 presentment date the motion was continued until March 7.

The very next day, March 2, 2012, the U.S. Trustee filed a formal notice of the appointment of an official unsecured creditors committee. The committee has three members: Bank of New York Mellon and The Wilmington Trust Company (the two TruPS creditors), and Moore, the personal injury claimant. No former directors or officers are on the committee.

The day before the continued hearing on the motion to reconstitute the committee, the committee (now extant) filed through its proposed counsel an objection to the motion. The committee argues that the movants are not really interested in adequate representation of their interests but instead want to control the committee themselves to pursue their own agenda. The committee notes that the only specific “high-risk strategy” that worries the movants is the prospect of the committee “ ‘suing officers and directors.’ ” (Obj. at 2 (quoting Mot. at 9)). The movants' “real motivations,” the committee asserts, are to prevent any investigation of possible claims against officers or directors and stave off objections to the release of those claims in the plan. (Obj. at 5).

On the March 7 continued date, the court held a hearing at which counsel for the movants, Brown, the U.S. Trustee, the committee, and the debtors were permitted to argue at some length. The movants and the committee disagreed about what they termed the court's “standard of review” of the U.S. Trustee's decision and how deferential that review should be. (Tr. at 6, 16). They also disagreed, of course, over whether reconstitution of the committee was necessary to ensure adequate representation of creditors. Although counsel for the movants and the committee tried to frame the latter issue differently (a difficult task given the papers they filed), the disagreement over adequacy of representation boiled down to deep suspicions on the movants' part about the motivations of the TruPS creditors and on the committee's part about the motivations of the directors and officers.

Twice during the hearing, the U.S. Trustee was invited to respond to the motion in writing but declined, citing the deliberative process privilege. (Tr. at 4, 34). See, e.g., In re Austin, No. 85–40639, 1990 WL 10007376, at *2 (Bankr.S.D.Ga. March 23, 1990) (U.S. Trustee asserted the privilege as basis for not producing documents concerning decision to move to dismiss chapter 11 case). The other parties similarly declined an invitation to file any further briefs. (Tr. at 34). The parties also refused an evidentiary hearing at which factual matters raised during argument might have been fleshed out and supported. (Id. at 34–35).

At the conclusion of the argument on March 7, the parties having expressed an urgent need for a decision, and with briefing concluded, the court set a ruling date of March 12, just five days later. As promised, the matter is ready for ruling.¹ The sole issue for decision is whether the membership of the existing committee must be changed to ensure adequate representation of creditors.²

2. Discussion

The answer is no. The motion is premised on the TruPS creditors' conflict of interest, a conflict resulting from the way the debtors' plan classifies and proposes to treat unsecured claims. But the movants' assertion that these creditors will breach their fiduciary duties as committee members and act contrary to the interests of the creditors they represent is currently no more than vague and unsupported speculation. The emergency motion to reconstitute the committee will be denied.

a. Statutory Framework

The ability of bankruptcy courts to alter the membership of statutory committees has an uneven history. Originally, section 1102(c) of the Code allowed a court to alter committee membership or size if the court determined that the membership was not representative. See 11 U.S.C. § 1102(c) (repealed 1986). Then, in 1986, the U.S. Trustee program was expanded and made permanent, and section 1102(c) was repealed, the goal being to “ ‘separate the administrative duties [of the United States trustee] from the judicial tasks, leaving bankruptcy judges free to resolve disputes untainted by knowledge of administrative matters unnecessary and perhaps prejudicial to an impartial judicial determination.’ ” In re Barney's, Inc., 197 B.R. 431, 438–39 (Bankr.S.D.N.Y.1996) (quoting H.R.Rep. No. 99–764, 99th Cong., 2d Sess. 18 (1986), reprinted in 1986 U.S.C.C.A.N. 5227, 5230). Despite the repeal of section 1102(c), however, courts continued to inject themselves into the committee process, often invoking section 105(a), 11 U.S.C. § 105(a), as a basis for “reviewing...