Matter of Washington Group, Inc.
| Decision Date | 05 September 1979 |
| Docket Number | No. B-77-695-B-77-699,B-77-700-B-77-702.,B-77-695-B-77-699 |
| Court | U.S. District Court — Middle District of North Carolina |
| Parties | In the Matter of The WASHINGTON GROUP, INC., Convenient Systems, Inc., Washington Mills Company, Johnston Mills Company, Johnston Mills Export Company, Spinners Processing Company, Washington Weaving Company and Washington Mills Sales Corporation, Debtors. |
John H. Northey, III, Lloyd C. Caudle, Charlotte, N.C., for David R. Johnston.
W. Donald Carroll, Jr., Charlotte, N.C., for The Northwestern Bank.
Roy G. Hall, Jr., Winston-Salem, N.C., for James R. Gilley.
Richard A. Gilbert, Winston-Salem, N.C., Trustee for Debtor Corporations.
William R. Sage, C. Edwin Allman, Winston-Salem, N.C., for appellees.
This matter is before the Court on appeal from an order of the Bankruptcy Court. The following two issues are presented: (1) whether in the circumstances of this case the Bankruptcy Judge erred in denying appellants an extension of time within which to file their appeal to this Court, and (2) whether the Bankruptcy Judge erred in allowing the Trustee in Bankruptcy to expend funds of the Debtors' estate to assist in defraying the costs of two potentially massive civil suits, in only one of which the Trustee is a named plaintiff, against former officers, directors, and fiduciaries of the Debtors. The three appellants, David R. Johnston, James R. Gilley, and the Northwestern Bank, are creditors and shareholders of the bankrupt companies. Jurisdiction is proper under Bankruptcy Rule 801 and 28 U.S.C. § 1334.
On June 20, 1977, Chapter X reorganization proceedings commenced with respect to the Washington Group, Inc. and its subsidiaries. R. A. Gilbert was appointed Trustee in Bankruptcy, and he immediately began his investigation and operation of the bankruptcy corporations. He filed his report to the Bankruptcy Court on June 30, 1978, and in that report he included facts pertaining to potential causes of action available to the estate.
On July 21, 1978 and July 25, 1978, respectively, the Bankruptcy Judge entered orders that (1) authorized the Trustee to assist employees of the Debtors in securing compensation for losses occasioned by mismanagement of employee benefit plans, and (2) authorized the Trustee to sue on behalf of the estate and to join with any other plaintiffs in such action. On July 25, 1978, two civil class actions relating to the affairs of the Debtors were filed in this court. Gilbert v. Bagley, C-78-335-WS, and Fulk v. Bagley, C-78-333-WS. Gilbert involves claims by the Trustee, on behalf of the Debtors, asserting waste, mismanagement, and breach of fiduciary duties by officers, directors, and other fiduciaries of the Debtors. Additionally, Gilbert includes claims by certain representative shareholders of the Debtor, The Washington Group, Inc., on behalf of a proposed class of such shareholders, based on alleged securities law fraud and related misconduct, as well as unlawful conduct during the pendency and settlement of an earlier shareholders' action. In Fulk, certain representative employees of the Debtors, on behalf of a proposed class of such employees, have asserted federal and common law claims arising out of abuses in the management of the debtor corporations' various employee benefit plans by directors, officers, and other fiduciaries of the Debtors. The Trustee is not a party in Fulk. Discovery relative to class certification issues has been completed in both actions. General discovery, however, has been stayed pending resolution of a criminal action against certain of the named defendants.
On January 15, 1979, the Trustee filed an Application with the Bankruptcy Court seeking express authority to expend the funds of the Debtors for costs, other than attorneys' fees, in the Gilbert and Fulk actions, asserting that "it would be in the best interest of the continued administration of these reorganization proceedings to assist in defraying the reasonable and necessary costs of maintaining" the Fulk and Gilbert actions. No notice was given to the Debtors' creditors or stockholders. In an order dated January 16, 1979, without the benefit of any hearing, the Bankruptcy Judge granted the Application. That order stated in pertinent part:
The Clerk did not, nor was he directed to, send copies or other notice of this order to counsel for any of the creditors herein.
The ten day period within which to appeal this order expired on January 26, 1979. On February 9, 1979, David R. Johnston and the Northwestern Bank both filed Notices of Appeal from the January 16, 1979 order. On the same date, Johnston and Northwestern requested pursuant to Bankruptcy Rule 802(c) that the Bankruptcy Judge retroactively extend the ten-day period. On February 12, 1979, James R. Gilley filed his Notice of Appeal from the January 16, 1979 order, but did not request a retroactive extension of time. At a hearing on February 27, 1979, the Bankruptcy Judge denied the motions of Northwestern and Johnston for a retroactive extension of time in which to appeal. An order to that effect was entered on March 12, 1979. Northwestern filed a Notice of Appeal from the March 12, 1979 order on March 21, 1979, together with a Designation of Record on Appeal and Statement of Issues. On March 23, 1979 Johnston filed a Notice of Appeal of the March 12, 1979 order, together with his Designation of Record on Appeal and Statement of Issues.
On appeal before this Court, therefore, are the two orders of the Bankruptcy Judge entered on March 12, 1979 and January 16, 1979, respectively. Consideration of the earlier dated order is dependent upon a reversal of the later order.
Any analysis of these questions must be predicated upon an understanding of the overall context of and relationship between the bankruptcy proceedings and the pending civil actions. The three appellants in this action, James R. Gilley, David R. Johnston, and the Northwestern Bank, are all defendants in Gilbert, and appellants Gilley and Northwestern are defendants in Fulk. Appellants Johnston and Northwestern, however, are also creditors of the bankrupt Debtors, and it is in this capacity that they are seeking to reverse the order of January 16, 1979, authorizing expenditure of the estate's funds to support the Gilbert and Fulk actions. Appellant Gilley is the majority shareholder of the Washington Group, and he is similarly interested in preventing improper use of the Debtors' limited resources. Therefore, while these appellants all may legitimately attack an order the effect of which will be dilution of the bankrupts' monies, the Court cannot help but be aware that success on the issues now pending will redound to appellants' benefit in their capacities as defendants in the civil actions.1
The threshold inquiry is whether the Bankruptcy Judge was mistaken in denying appellants' motion for a retroactive extension of the ten day appeal period. Bankruptcy Rule 802(c) requires that requests for extensions be made within the ten day period, "except that a request made after the expiration of such time may be granted upon a showing of excusable neglect." As the District Court for the Southern District of New York has noted:
The question of excusable neglect is left to the discretion of the Bankruptcy Court Judge whose decision should not be set aside unless the `reviewing court has a definite and firm conviction that the court below committed a clear error of judgment . . . .'
In re Gurda, 19 Collier Bankruptcy Cases 568, 569 (S.D.N.Y.1979) (footnotes omitted). For the reasons that follow, the Court has concluded that the Bankruptcy Court's order of March 12, 1979, was clearly erroneous.
Notions of fundamental fairness impel a reviewing court to look closely at actions taken ex parte. This is especially so where a Trustee in Bankruptcy is asking for approval of what could be substantial expenditure of the Debtors' funds. Creditors and shareholders of the bankrupt estates have an absolutely legitimate interest in monitoring the manner in which the estate's resources are spent, and the Trustee, as their legal representative, owes them a duty to keep them informed of his activities. See Bankruptcy Rule 10-209. That the instant appellants also happen to be defendants in the Bagley and Fulk actions does not in any way limit their right, as creditors and shareholders, to be informed of, and in appropriate circumstances, to participate in, important actions taken by the Trustee. The Court therefore cannot help but look initially with suspicion upon the actions taken in this matter by both the Trustee and the Bankruptcy Court.
Appellants have not cited, nor has the Court in its research discovered, either a case or Bankruptcy Rule precisely on point. Other than the broad principles enunciated above, drawn from the general spirit of the bankruptcy process, Bankruptcy Rule 10-209(b)(6) seems to be the most nearly applicable provision. It provides that the Trustee shall give all creditors and stockholders at least twenty days notice of "the hearing on applications for . ....
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...benefit of the corporation's residual claimants. Compare 11 U.S.C. Sec. 704(1); Weintraub, 105 S.Ct. at 1993; In re Washington Group, Inc., 476 F.Supp. 246, 250 (M.D.N.C.1979), aff'd sub nom. Johnston v. Gilbert, 636 F.2d 1213 (4th Cir.1980), cert. denied, 452 U.S. 940, 101 S.Ct. 3084, 69 L......
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