In re Trico Marine Services, Inc., Bankruptcy No. 04-17985(SMB).

Citation343 B.R. 68
Decision Date05 May 2006
Docket NumberBankruptcy No. 04-17985(SMB).,Adversary No. 05-2313.
PartiesIn re TRICO MARINE SERVICES, INC., et al., Debtors. Steven Salsberg and Gloria Salsberg, Plaintiffs, v. Trico Marine Services, Inc., Trico Marine Assets, Inc., Trico Marine Operators, Inc. and Trico Marine International, Inc., Defendants.
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

Kirkland & Ellis LLP (Robert G. Burns, Esq., Robert R. Urband, Esq., of Counsel), New York, NY, for Defendant.

Steven C. Salsberg, New York, NY, Plaintiff Pro Se.

Law Office Of Joseph P. Garland (Joseph P. Garland, Esq., of Counsel), New York, NY, for Gloria Salsberg.

OPINION AND ORDER GRANTING REARGUMENT, ADHERING TO THE COURT'S ORIGINAL DECISION AND GRANTING IN PART AND DENYING IN PART PLAINTIFFS' MOTION TO SUPPLEMENT THE RECORD

STUART M. BERNSTEIN, Chief Judge.

The plaintiffs ("Salsberg") commenced this timely adversary proceeding to revoke the confirmation order entered on January 21, 2005. In an opinion and order dated January 6, 2006, the Court granted the motion for summary judgment made by the defendant reorganized debtors ("Trico") on the ground that the revocation order could not protect innocent third parties, and would cause substantial uncertainty. Salsberg v. Trico Marine Servs., Inc. (In re Trico Marine Servs., Inc.), 337 B.R. 811, 816 (Bankr.S.D.N.Y.2006)("Opinion"). Due to a misunderstanding on my part, I thought that the matter had been fully submitted at the time that the decision was rendered. Salsberg, however, had reserved the right to supplement the record,

Salsberg subsequently supplemented the record, and also sought leave to supplement it a second time. Trico opposed the second supplement, and urged me to adhere to the original disposition. Treating Salsberg's first supplement as a motion for reargument, I grant the motion, but upon reconsideration, adhere to my original decision. In addition, the motion to supplement the record for a second time is denied, except to the extent that Trico's 2005 Form 10-K, issued after the first supplement and submitted with the second supplement, will be deemed part of the record.

BACKGROUND

The background is set out in the Opinion, familiarity with which is assumed. Only the facts necessary to provide context to this decision are set forth.

Trico's plan went effective on March 15, 2005. On that date, Trico cancelled the outstanding Notes representing approximately $275 million, and issued 10 million shares of New Common Stock to the Noteholders. Under a plan agreement with the Noteholders, the holders of the Old Common Stock, which was cancelled under the plan, received warrants exercisable for up to 10% of the New Common Stock. The New Common Stock is traded through NASDAQ.

On or about October 24, 2005, Trico issued an additional 4,273,000 shares of New Common Stock through a secondary offering at a public offering price of $24.00. According to Trico's 2005 Form 10-K, there are 14,638,103 outstanding shares of New Common Stock. The difference between the latter amount and the New Common Stock issued under the plan or through the secondary offering may be explained by the exercise of some of the warrants issued to the holders of the Old Common Stock.

The New Common Stock is actively traded. Trico's counsel represented at a March 14, 2006 hearing that during the preceding three months, the average daily trading volume for Trico common stock was 143,000 shares. (Transcript of hearing, held Mar. 14, 2006, at 19-20)("Tr.") In other words, approximately 13 million shares exchanged hands during the three month period. Consequently, while there may still be former Noteholders who hold the New Common Stock issued to them under the plan, ownership of the New Common Stock has turned over several times, at least on a statistical basis.

Finally, the provenance of a current shareholder's stock would be hard to discern. Salsberg concedes that it would be very difficult, if not impossible, to distinguish those whose New Common Stock was issued under the plan from those whose shares originated under the secondary offering. (See Tr. 6-14.)

DISCUSSION
A. Introduction

Section 1144 governs revocation of a confirmed chapter 11 plan. It states:

On request of a party in interest at any time before 180 days after the date of the entry of the order of confirmation, and after notice and a hearing, the court may revoke such order if and only if such order was procured by fraud. An order under this section revoking an order of confirmation shall —

(1) contain such provisions as are necessary to protect any entity acquiring rights in good faith reliance on the order of confirmation; and

(2) revoke the discharge of the debtor.

"Revocation" is not defined in the Bankruptcy Code. In legal parlance, it means an annulment, cancellation or reversal, typically of an act or power. BLACK'S LAW DICTIONARY 1346 (8th ed.2004.) It is synonymous with "rescission." See WEBSTER'S THIRD NEW INT'L DICTIONARY UNABRIDGED 1930 (1981)(defining "rescission" to mean "an act of rescinding, annulling, or vacating or of cancelling or abrogating (as by restoring to another party a contract or transaction what one has received from him)").

Section 1144 includes two express requirements: the revocation order must (1) revoke the discharge, and (2) protect those who acquired rights in good faith reliance on the confirmation order. In addition, the revocation of the confirmation order reinstates the status quo ante. In re Ogden Modulars, Inc., 207 B.R. 198, 200 (Bankr.E.D.Mo.1997); Official Comm. of Unsecured Creditors v. Michelson (In re Michelson), 141 B.R. 715, 730 (Bankr. E.D.Cal.1992). Accordingly, the Court cannot revoke the plan unless "it can fashion an order that would revoke the debtor's discharge, restore the status quo existing before confirmation and protect those who relied in good faith on confirmation." S.N. Phelps & Co. v. Circle K Corp. (In re Circle K Corp.), 171 B.R. 666, 669 (Bankr.D.Ariz.1994).

If a plan, even a substantially consummated plan, simply distributes money to creditors, revocation may not pose a significant problem. The reinstated debtor-in-possession can sue to recover the distributions under the plan. Cf. Fulton Cty. Silk Mills v. Irving Trust Co. (In re Lilyknit Silk Underwear Co.), 73 F.2d 52, 53-54 (2d Cir.1934)(discussing a bankruptcy trustee's inherent equitable authority to recover payments made pursuant to a confirmation order that is subsequently reversed). Alternatively, the court can treat a dividend paid to a creditor as an offset against the creditor's allowed claim, i.e., as a preplan distribution. See Kelly v. Giguere (In re Giguere), 165 B.R. 531, 537 (Bankr. D.R.I.1994). Lastly, vendors who dealt with the reorganized debtor and were paid would not require protection; unpaid vendors could be granted an administrative priority in the reinstated proceeding.

More complex plans involving transactions among the debtor, its creditors, and third parties obviously present greater problems. If stock is issued under a plan to creditors in satisfaction of their debts, restoration of the status quo requires the reinstatement of the debts and the cancellation of the stock. In addition, innocent parties that purchased the stock in the market would have to be protected under the express language of § 1144. The Opinion conflated these two requirements, but they are not necessarily the same. Those courts that have dismissed revocation complaints in such cases on equitable mootness grounds have properly focused on both concerns: the ability to reinstate the status quo ante and the ability to protect shareholders who purchased stock following the entry of the confirmation order. E.g., Chang v. Servico, Inc. (In re Servico, Inc.), 161 B.R. 297, 301-02 (S.D.Fla.1993)(refusing to revoke confirmation order where, inter alia, several million shares of stock were issued under the plan and had been actively traded); Almeroth v. Innovative Clinical Solutions, Ltd. (In re Innovative Clinical Solutions, Ltd.), 302 B.R. 136, 140-41 (Bankr.D.Del.2003)(refusing to revoke order confirming plan under which new common stock was issued to creditors and holders of old common stock, and the new common stock was actively traded in the over-the-counter market).

B. Salsberg's Proposal

Salsberg proposes that I revoke Trico's plan, cancel all of the New Common Stock and warrants, including the New Common Stock that was issued in the secondary offering, and give all of the current stockholders the reinstated Notes (and additional value, if necessary) as protection. (Plaintiffs' Memorandum of Law in Opposition to Motion to Dismiss, dated Jan. 23, 2006, at 8-9) ("Plaintiffs' Memo")(ECF Doc. # 19). His proposal is based on two incorrect assumptions, and does not work because the revocation order cannot restore the status quo ante or protect innocent parties.

1. The Restoration of the Status Quo Ante

The Court cannot restore the status quo because there is no basis in law to cancel the stock sold through the secondary offering. Consequently, the Court would have to be able to distinguish between current stockholders who hold shares that were issued under the plan from those whose stock was issued through the secondary offering. Only the former shares could be cancelled by the Court. Salsberg conceded at oral argument that the two issues have become commingled as a result of the substantial trading activity.

In addition, even if the Court could determine the provenance of a share of stock, the market activity raises another practical problem. To restore the status quo, the reinstated Notes must be returned to the Noteholders, and the corresponding New Common Stock must be cancelled. If a Noteholder sold its New Common Stock, it could not get the reinstated Note and also keep the proceeds of the stock sale. The Court would have to track the Noteholder's shares, possibly through several purchases and sales, and order...

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