In re Unichem Corp.
| Decision Date | 30 March 1987 |
| Docket Number | No. 83 B 13763.,83 B 13763. |
| Citation | 72 BR 95 |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
| Parties | In re UNICHEM CORPORATION, Debtor. |
Towbin & Zazove, Ltd., Chicago, Ill., for debtor.
Morris Hass, Chicago, Ill., for the Unsecured Creditors Committee.
Dean C. Harvalis, Chicago, Ill., U.S. Trustee.
Faye B. Finstein, Antonow & Fink, Chicago, Ill., for William Gurtler.
This matter comes before the court on the debtor's objections to the disclosure statement filed by William Gurtler. The court, having considered the arguments of counsel and memoranda submitted, denies approval of the disclosure statement submitted by Gurtler for the reasons hereinafter set forth.
Unichem is an Illinois Corporation incorporated in 1969 engaged in the manufacture and distribution of chemical cleaning compounds, with its principal markets being commercial laundries, dry cleaning institutions, and hotels. Unichem's current shareholders are Eugene Korey (25.5%), Nowell Korey (25.5%) and William Gurtler (49%). Eugene Korey is the President of Unichem. Nowell Korey is the Secretary. William Gurtler is Unichem's former President and General Manager.
On November 7, 1983, Unichem filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code (11 U.S.C. § 101 et seq.).1 Since that time, Unichem has continued to operate its business as a debtor in possession in accordance with § 1108. Pursuant to §§ 1121 and 1125, Gurtler has submitted a plan of reorganization and disclosure statement.2 As required by § 1125(b), a hearing was held on Gurtler's disclosure statement on March 3, 1987. At that hearing, both the debtor and the U.S. Trustee voiced serious objections to Gurtler's proposed disclosure statement. The main thrust of the objections raised was that the accompanying proposed plan to the disclosure statement could not legally be confirmed. In other words, if at a hearing on the disclosure statement it is apparent the accompanying plan does not conform to the requirements of § 1129, the court should withhold approval and distribution of the disclosure statement. Additionally, other objections were made based on the lack of adequate information.
Section 1125(b) requires that before acceptance or rejection of a plan may be solicited from creditors, the proponent of a plan must submit a disclosure statement which, after notice and a hearing, must be approved by the court. In order to approve a disclosure statement, the court is obligated to determine that the disclosure statement contains "adequate information." See § 1125(b).
Section 1125(a)(1) defines "adequate information":
(1) "adequate information" means information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the debtor and the condition of the debtor\'s books and records, that would enable a hypothetical reasonable investor typical of holders of claims or interests of the relevant class to make an informed judgment about the plan, but adequate information need not include such information about any other possible or proposed plan; Additionally, § 1125(d) provides that whether a disclosure statement contains adequate information is governed solely by the provisions of the Bankruptcy Code. Determination of the adequacy of a disclosure statement, and, therefore, approval of it, is within the sound discretion of the bankruptcy court and is to be determined on a case by case basis. In re Snyder, 56 B.R. 1007 (Bankr.N.D.Ind.1986); In re Medley, 58 B.R. 255 (Bankr.E.D.Mo.1986). The primary purpose of a disclosure statement is to provide all material information which creditors and equity security holders affected by the plan need in order to make an intelligent decision whether to vote for or against the plan. In re Ligon, 50 B.R. 127 (Bankr.M.D.Tenn.1985); In re William F. Gable Co., 10 B.R. 248 (Bankr.N.D.W. Va.1981). See Ginsberg, Bankruptcy, ¶ 13,461 at 13,047-050 (1985).
In the case sub judice, the court is faced with the additional issue whether it should approve a disclosure statement when it is clear at the time of the hearing on the disclosure statement that the plan accompanying the disclosure statement can not be confirmed because it does not comply with the requirements of § 1129. Since the court finds that the disclosure statement does not contain adequate information and that the plan does not comply with the requirements of § 1129, it will not approve Gurtler's proposed disclosure statement.
The court finds that since Gurtler's disclosure statement is illusory and contains many contingencies which are not clearly spelled out, it would be difficult for creditors to make an informed judgment regarding Gurtler's plan. Gurtler's disclosure statement indicates that unsecured creditors can expect to receive approximately $.60 for every dollar of unsecured claim. (The debtor's plan proposes a payment to unsecured creditors of $.12 for every dollar of unsecured claim). However, the disclosure statement does not adequately inform the creditors how conditional that payment is or of the strings Gurtler has attached to it.
The payment of the unsecured claims is proposed to come from a $200,000 cash infusion to the estate by a company to be formed by Gurtler. Basically, Gurtler will be buying the assets of the debtor for $200,000. What the disclosure statement does not adequately disclose is that under certain circumstances, Gurtler would be relieved of his obligation to pay the $200,000. If Gurtler does not pay the $200,000, the debtor would be liquidated and unsecured creditors would receive nothing. The contingencies which would allow Gurtler to back out are numerous. First and foremost, Gurtler's plan requires extensive post-confirmation cooperation from the existing management of the debtor. The court over the last three years has had ample opportunity to witness the acrimonious relationship between Gurtler and the debtor's management. It is unlikely that if Gurtler's plan were approved, current management of the debtor would cooperate with Gurtler, the new owner of the debtor's assets, and the court is without authority to order them to cooperate. Such lack of cooperation would relieve Gurtler of, or allow him to withdraw, his contribution.
In addition, Gurtler owes the debtor approximately $60,000 as a result of a state court judgment (discussed in detail infra). Gurtler's disclosure statement is misleading to the extent that it does not adequately disclose that if Gurtler's plan is confirmed, he will not have to pay the judgment. The net result is that Gurtler's offer to purchase the debtor's assets for $200,000 is really only a $140,000 offer since absent Gurtler's plan, he is obligated to pay the debtor $60,000 to satisfy the judgment.3
For these and other reasons discussed at the hearing on the disclosure statement on March 3, 1987, Gurtler's disclosure statement does not contain adequate information. If that were its only shortcomings, perhaps the disclosure statement could be amended to meet these objections. However, as discussed below, the court finds as a matter of law that under no set of circumstances could Gurtler submit a confirmable plan.
Section 1129(a) provides that a "court shall confirm a plan only if all of the following requirements are met." The section then lists twelve requirements, one of which is "The plan has been proposed in good faith . . ." § 1129(a)(3). A bankruptcy court has an independent duty to ascertain that a plan complies with all the requirements of § 1129(a), including the good faith requirement. In re Hoosier Hi-Reach, Inc., 64 B.R. 34 (Bankr.S.D.Ind.1986); In re Wallace, 61 B.R. 54 (Bankr.W.D.Ark. 1986).
Although the issue of whether a plan meets the requirements of § 1129(a) is usually reserved for the hearing on confirmation, in certain circumstances it is appropriate for the court to consider the issue at the hearing on the disclosure statement. One such circumstance is where it is readily apparent that the plan accompanying the disclosure statement could never legally be confirmed. In re Pecht, 53 B.R. 768 (Bankr.E.D.Va.1985); In re McCall, 44 B.R. 242 (Bankr.E.D.Pa.1984). In this case, the court finds that any plan proposed by Gurtler could never meet the good faith requirement of § 1129(a). "Submitting the debtor or creditor or shareholder to the attendant expense of soliciting votes and seeking court approval on a clearly fruitless venture would be costly and it would unduly delay any possibility of a successful reorganization." In re Pecht, supra, at 769-70.
In order to understand why this court finds that Gurtler could never submit a plan that would meet the good faith requirement of § 1129(a), a review of the relationship between Gurtler and the debtor is necessary. Gurtler was the president and a member of the Board of Directors of Unichem until he resigned on March 12, 1982. Shortly after Gurtler resigned, Unichem brought an action against Gurtler in the Circuit Court of Cook County alleging that Gurtler breached the fiduciary duty he owed to Unichem as an officer and director. The trial court found that as a matter of law Gurtler breached his fiduciary duty to Gurtler and assessed damages of $47,964.80 plus interest accruing from the date of judgment plus attorneys fees. The judgment was affirmed by the Illinois Court of Appeals in Unichem v. Gurtler, 148 Ill.App.3d 284, 101 Ill.Dec. 400, 498 N.E.2d 724 (1986) and the Illinois Supreme Court denied certiorari.
The appellate court stated the facts as follows:4
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