In re Wisconsin Steel Corp.
| Citation | 48 BR 753 |
| Decision Date | 06 March 1985 |
| Docket Number | Bankruptcy No. 80 B 03766-80 B 03773,Adv. No. 81 A 442. |
| Parties | In re WISCONSIN STEEL COMPANY, a Delaware corporation, et al., Debtors. WSC CORP. and all of the other debtors in possession v. INTERNATIONAL HARVESTER COMPANY, et al. |
| Court | United States District Courts. 7th Circuit. United States District Court (Northern District of Illinois) |
Allan Sweig, Nachman, Munitz & Sweig, Chicago, Ill., for Wisconsin Steel and all debtors in possession.
George Newton, Kirkland & Ellis, Chicago, Ill., for International Harvester, et al.
This case is before the court on an appeal by International Harvester Company ("Harvester") from an order of Bankruptcy Judge Charles B. McCormick denying Harvester's motion to disqualify him and counsel for the debtors in possession from further participation in this proceeding. The basis for the disqualification and other relief sought by Harvester is that two judicial opinions in the case purporting to have been written by Judge McCormick were in fact written by the attorneys for the debtors in possession, without the knowledge of Harvester.
For approximately 75 years prior to 1977, International Harvester Company owned and operated a steel mill on the south side of Chicago known as the Wisconsin Steel Works, along with a railroad, coal mines, iron mines and an ore carrying vessel on the Great Lakes. The purpose of these operations was to furnish steel to International Harvester for use in its manufacturing plants. The various operations were known collectively as the Wisconsin Steel Division of International Harvester.
In July 1977, Harvester sold the Wisconsin Steel Division to Envirodyne Industries, Inc. in a complicated transaction whereby the assets of the Division were transferred to a number of subsidiaries of a holding company organized by Envirodyne for that purpose. The sales price was $65 million, with $15 million paid to Harvester at the time of closing and the balance to be paid over time. Promissory notes for the balance of the purchase price were secured by the assets of the Division. As part of the transaction, the buyer assumed the liabilities of the Division, including an unfunded liability of approximately $86 million in pension benefits for Wisconsin Steel Division employees.
Not long after the sale, the purchasers (who, for convenience, are referred to in these proceedings as "WSC") encountered financial difficulty in making the required payments to Harvester and satisfying their other creditors, including several banks which had extended substantial loans. On March 31, 1980, WSC shut down its operations and filed for reorganization under Chapter 11 of the Bankruptcy Act, 11 U.S.C. § 1101 et seq. The bankruptcy petition was filed on behalf of the debtor by the law firm of Nachman, Munitz & Sweig, whose employment as attorneys for the debtor was approved by Judge McCormick on April 3, 1980. No trustee was appointed for the estate, and WSC was permitted to operate the business as debtor in possession.
International Harvester filed a proof of claim against the bankrupt estate, alleging secured claims totalling $146,627,830.00.
WSC filed a counterclaim against Harvester, alleging fraud in the sale of Wisconsin Steel to Envirodyne. The counterclaim alleges that Harvester knowingly made false representations concerning the value of the assets and the earning potential of Wisconsin Steel and that Harvester has failed to live up to various commitments it made in connection with the sale. The counterclaim charges that the sale was basically a fraudulent scheme by Harvester, its Board of Directors, and one of its senior vice presidents to unload an unprofitable operation and defeat the claims of creditors. WSC asks that the claims of Harvester be subordinated to the claims of all other creditors and that various assets of Wisconsin Steel which have been retaken by Harvester be returned to the bankrupt estate.
Harvester made a motion to dismiss the counterclaim for failure to state a claim on which relief could be granted. The parties briefed the motion before Judge McCormick and the matter was taken under advisement. On November 18, 1982, Judge McCormick filed an 11-page opinion denying the motion to dismiss. The opinion paraphrases in detail the allegations of the counterclaim, discusses and quotes from a number of authorities and concludes that if the allegations are proved WSC will be entitled to all of the relief it seeks against Harvester and the individual defendants.
Discovery began in the adversary proceeding between WSC and Harvester, and in May 1983 WSC made a demand for all written communications between Harvester and its attorneys concerning the sale of the Wisconsin Steel Division. Harvester objected that these documents were protected by the attorney-client privilege, and the question was briefed before Judge McCormick. WSC contended that the communications were made in connection with a fraud and were therefore not protected by the privilege. Harvester denied that any fraud had occurred, and the issue became whether there was such prima facie proof of fraud as to warrant penetration of the privilege. In August 1983, WSC submitted a 15-volume appendix of deposition transcripts and other materials to support its contention that a prima facie showing of fraud had been made.
On January 7, 1985, Judge McCormick issued an 11-page opinion in which he found that WSC had made a prima facie showing of fraud and ordered that the attorney-client communications be delivered to WSC within 15 days. The opinion stated that "the Court has reviewed all of the evidence submitted by WSC in support of its motion to compel production of documents and is satisfied that such evidence establishes prima facie proof of the following facts: . . .," and then recited substantially verbatim the same paraphrase of the counterclaims' allegations that had been contained in the November 1982 opinion denying the motion to dismiss. There was no mention of any particular document or testimony and no reference to any material in the 15-volume appendix.
The opinion was signed and dated January 7, 1985, in Judge McCormick's own hand.
On January 9, 1985, at 9:30 a.m. the deposition of James C. Cotting was being taken by Mr. George D. Newton, Jr., one of the attorneys for Harvester, and Ms. Leslie Vercoe, an associate with the firm of Nachman, Munitz & Sweig.1 Ms. Vercoe stated (on the transcript) that Judge McCormick's discovery order of January 7 had been "received in our office yesterday," January 8. Mr. Newton remarked that he had not received a copy of the order and asked Ms. Vercoe to send him one by messenger. She agreed to do so, and later that day Mr. Newton received a copy of the order by messenger along with a letter from Ms. Vercoe stating, "Our office received a copy of this order on January 8, 1985, via mail." Later on January 9, Mr. Newton appeared before Judge McCormick at a status call on the case, and at that time there was a colloquoy between Mr. Newton, Judge McCormick, Ms. Karen Gebbia and Mr. Allan Sweig of the Nachman, Munitz & Sweig firm concerning the fact that Nachman, Munitz & Sweig had received a copy of the January 7 order and no one else had. Judge McCormick's minute clerk stated that the order had been mailed the evening of January 8 (Judge McCormick's secretary had informed Mr. Newton earlier that day that the order had been mailed on January 7). Mr. Sweig stated that his office had received the order the morning of January 8 and Ms. Gebbia said that it was on her desk at 1:00 p.m. on January 8 when she had returned from court. The focus of the discussion was how Nachman, Munitz & Sweig could have received an opinion through the mail the same day it had been mailed.
On January 11, Mr. Newton received a letter from Mr. Sweig stating that upon checking further with Judge McCormick's law clerk and secretary he learned that the statement made by the minute clerk the previous day was in error and that the order had been mailed on January 7 rather than on January 8.
Mr. Newton and other members of his firm, Kirkland & Ellis, then began examining various pleadings and orders in the court file and decided to consult an examiner of questioned documents. They retained Mr. Donald Doud, who concluded on the basis of water marks and typewriting analysis that Judge McCormick's opinions of November 18, 1982, denying the motion to dismiss and January 7, 1985, ordering document production were typed by the same word processors and on the same paper stock as were used to prepare pleadings filed by the Nachman firm. Counsel for Harvester then prepared a motion to disqualify Judge McCormick and the Nachman firm, supported by affidavits of Mr. Newton and Mr. Doud. The motion was presented to Judge McCormick on January 22, 1985, and after a short hearing, he denied it. Mr. Newton began the hearing by informing Judge McCormick of the results of the document examination and Harvester's conclusion that there had been ". . . an inappropriate ex parte communication between your Honor and Mr. Sweig." Judge McCormick replied that he did not recall the circumstances of the November 1982 order, but that in regard to the January 7, 1985, order he had:
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