Opinion
No. 04 CIV. 8645 (RPP), Ch. 11 Case Nos, LEAD CASE 03-41710 (RDD) 03-41709 Through 03-41728 (RDD) (Jointly Administered).
December 23, 2004
Tony Christ Falls Church, VA.
Jeffrey M. Swarts, Danville, Ohio, Pro Se for Ad Hoc Loral Stockholders Protective Committee.
Weil, Gotshal Manges LLP, Stephen Karotkin, Esq., Rachel B. Ehrlich, Esq., New York, NY, Counsel for Loral Space Communications Ltd.
OPINION AND ORDER
The Appellants, Loral Stockholders Protective Committee (the "LSPC"), appeal pro se the September 2, 2004 judgment of the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"), denying their motion for the appointment of an examiner under Sections 1104(c)(1) and (2) of the Bankruptcy Code, 11 U.S.C. § 101 et seq. In response to a December 7, 2004 letter from the LSPC requesting an expedited hearing on this appeal and stating that it would rely on the papers it had already filed, this Court issued an Order on December 8, 2004 directing the Appellees to file opposing briefs by December 15, 2004 directed "at least in part to the issue of whether Judge Drain was correct in determining that an independent examiner should not be appointed for the limited purpose of investigating whether the debtors' and the creditors' committees' professionals had followed the proper procedures in conducting their valuation analyses of the going concern value of Loral Space Communications Ltd., including the orbital space slots." The Court heard argument on this issue on December 17, 2004. At the conclusion of the argument, the Court issued a ruling reversing the Bankruptcy Court's denial of the LSPC's motion for the appointment of an examiner.
The Bankruptcy Court referred to the LSPC as the "Ad Hoc Committee." According to the Bankruptcy Court, the LSPC represents approximately 8.4 percent of the outstanding common shares of Loral.
I. PROCEDURAL BACKGROUND
Based on the Bankruptcy Court's opinion, the following is the procedural history of this proceeding. Loral Space Communications Ltd. ("Loral") and its affiliated debtors and debtors in possession (with Loral, the "Debtors") filed their Chapter 11 petitions on July 15, 2003. The LSPC, which proceeds pro se here as it did in all related proceedings in the Bankruptcy Court, moved for the appointment of an official shareholders' committee in September 2003, after learning that the U.S. trustee did not intend to appoint such a committee on its own. The Bankruptcy Court denied this motion after a hearing on September 19, 2003. The LSPC moved again for the appointment of an official shareholders' committee on October 27, 2003. Finding that the Debtors were hopelessly insolvent, the Bankruptcy Court denied the LSPC's second motion at a December 2, 2003 hearing.
On May 2, 2004, after learning of the Debtors' agreement with the Official Committee of Unsecured Creditors (the "Creditors' Committee") that the Chapter 11 plan would provide for no recovery by common shareholders, the LSPC moved for a third time for the appointment of an official shareholders' committee. In support of its motion, the LSPC argued that an official shareholders' committee could conduct a valuation of Loral that would support its view that the Debtors and Creditors' Committee had valued Loral at several hundreds of millions of dollars lower than its true value. After a hearing on May 21, 2004, the Bankruptcy Court denied the motion for the appointment of an official shareholders' committee by order dated May 28, 2004. The LSPC's appeal of this order is pending.
Under the terms of the plan, the equity of the post-bankruptcy corporation would be split between the corporation's managers and its creditors.
The LSPC also argued that an official shareholders' committee was necessary because the Debtors' management had engaged in numerous misrepresentations and self-dealing.
On July 22, 2004, the Debtors announced their agreement with the Creditors' Committee on the terms of a Chapter 11 plan. Under this plan, Loral's preferred and common shareholders will not receive any distributions. On August 5, 2004, the LSPC moved for the appointment of an examiner under 11 U.S.C. §§ 1104(c)(1) and (2). The LSPC argued that an examiner was necessary "to provide a complete appraisal of the Debtor assets and liabilities in question." The Bankruptcy Court held a hearing on August 19, 2004, at which the LSPC made the same arguments in support of the examiner motion as it had previously made in support of its motion for the appointment of an official shareholders' committee: the LSPC argued (1) that the Debtors were undervaluing many of their most valuable assets; and (2) that the Debtors and Creditors' Committee were improperly colluding to depress the valuations of Loral. The Court rejected the LSPC's motion at the August 19, 2004 hearing and issued a memorandum decision on September 2, 2004. In re Loral Space Communications Ltd., 313 B.R. 577 (Bankr. S.D.N.Y. 2004). The LSPC filed a Statement of Issues and Notice of Appeal of the denial of the motion for the appointment of an examiner on August 19, 2004, the same day the Bankruptcy Court issued its bench ruling denying the motion. This Court received the record on appeal from the Bankruptcy Court on November 19, 2004.
On November 18, 2004, the LSPC moved for a stay of the confirmation hearing scheduled for January 31, 2005; the LSPC amended the motion on November 30, 2004. On December 6, 2004, this Court heard argument on the LSPC's motion for a stay of the Bankruptcy Court's confirmation hearing pending determination of its appeal of the Bankruptcy Court's denial of its motion for an examiner. At the conclusion of the argument, the Court denied the LSPC's motion for a stay. The motion for the appointment of an examiner was not before the Court.
The Appellees stated at the December 17, 2004 hearing before this Court that the confirmation hearing will not be held in January and that a new date has not yet been scheduled.
On December 7, 2004, this Court received a letter from the LSPC requesting an expedited appeal of the Bankruptcy Court's denial of its motion to appoint an examiner pursuant to 11 U.S.C. § 1104(c)(2) and stating that it would rely on the papers it had already filed. This Court issued an Order the following day, December 8, 2004, that the Appellees file opposing briefs by December 15, 2004 directed "at least in part to the issue of whether Judge Drain was correct in determining that an independent examiner should not be appointed for the limited purpose of investigating whether the debtors' and the creditors' committees' professionals had followed the proper procedures in conducting their valuation analyses of the going concern value of Loral Space Communications Ltd., including the orbital space slots." The Court heard argument on December 17, 2004. At the conclusion of the hearing, this Court reversed and remanded the Bankruptcy Court's decision to deny the LSPC's motion for the appointment of an examiner and ordered the Bankruptcy Court to appoint an examiner within ten (10) days.
II. APPLICABLE LAW
Section 1104(c) of the Bankruptcy Code provides the following with regard to the appointment of an examiner:
(c) If the court does not order the appointment of a trustee under this section, then at any time before the confirmation of a plan, on request of a party in interest or the United States Trustee, and after notice and hearing, the court shall order the appointment of an examiner to conduct such investigation of the debtor as is appropriate, including investigation of any allegations of fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor of or by current or former management of the debtor, if —
(1) such appointment is in the interests of creditors, any equity security holders, and other interests of the estate; or
(2) the debtor's fixed, liquidated, unsecured debts, other than debts for goods, services, or taxes, or owing to an insider, exceed $5,000,000.11 U.S.C. § 1104(c).
This section was formerly Section 1104(b) of the Bankruptcy Code and many of the cases cited in this Order reference it as such.
III. DISCUSSION
Judge Drain recognized in his opinion, filed September 5, 2004, that the debtors fixed, liquidated, unsecured debts, other than debts for goods, services, or taxes, or owing to an insider, exceed $5,000,000. He also acknowledged that Loral was a public company and that the legislative history of 11 U.S.C. § 1104(c)(2) indicates that the purpose of establishing the threshold figure of $5,000,000 was to protect equity holders of public companies. Judge Drain further recognized that the majority view of Section 1104(c)(2) requires appointment of an examiner if the $5,000,000 threshold is met. He then cited In re Revco D.S., Inc., 898 F.2d 498 (6th Cir. 1990), which recognized that if the debt threshold is met, appointment of an examiner is mandatory. Judge Drain also noted that under In re Revco, the Bankruptcy Court has discretion to "prescribe the parameters of examiners' investigations as is appropriate." In re Loral, 313 B.R. at 586. The parties acknowledge that there is no Second Circuit opinion interpreting 11 U.S.C. § 1104(c)(2). Accordingly,In re Revco, which is cited with approval in Collier on Bankruptcy, is the only circuit court authority on this issue.See 7 Collier on Bankruptcy ¶ 1104.03[2][b] at 1104-38 (15th ed. rev. 2004) (hereinafter "Collier") (stating that the Bankruptcy Court has no discretion to deny a motion to appoint an examiner under Section 1104(c)(2) when the debt threshold is met and the motion is made by a party in interest).
The Bankruptcy Court, however, departed from the "majority view" to state, without citation to any legal authority: "[I]t is not at all clear that the court should go the extra mile under section 1104(c)(2) to try to conceive of an appropriate investigation if the movant has sought a wholly inappropriate one." Id. at 587. Thus, the Bankruptcy Court decided not to prescribe the parameters of the examiner's investigation, as allowed by Section 1104(c) and as permitted under the decision inIn re Revco and the treatise Collier on Bankruptcy. Instead, Judge Drain argued that "[u]nless the court decides to appoint an examiner sua sponte, the statute requires that consideration of the appointment of an examiner be conducted only on request by a party in interest after notice and a hearing. 11 U.S.C. § 1104(c). If the only requested appointment [here, to conduct an appraisal or valuation for the Ad Hoc Committee] is wholly inappropriate, why should the court stretch to fashion a more appropriate job description for an examiner if none would justify sua sponte appointment?" Id. (footnote omitted). He cites no authority for this unspoken conclusion. Judge Drain concludes, "notwithstanding the legislative history of section 1104(c)(2) of the Bankruptcy Code, the appointment of an examiner pursuant to the terms of sections 1104(c)(1) and (c)(2) of the Bankruptcy Code to conduct a going concern valuation of the Debtors should be denied." Id. at 588.
In his final footnote to the opinion, Judge Drain reveals that he had prescribed an investigatory role for the examiner at the hearing. Instead of appointing an examiner to conduct a going concern valuation as the Ad Hoc Committee had requested, he proposed at the hearing to appoint an examiner "to review whether the Debtors and the Creditors' Committee's professionals had followed proper procedures in conducting their valuation analyses." Id. at 577 n. 17. The footnote states that the Appellants responded affirmatively to the proposal, "but their response was qualified by concerns that the Ad Hoc Committee had not had enough time to think about the suggestion and that it would want to become comfortable with the adequacy of the budget and the description of the examiner's proposed duties." Id. Thus, the court did prescribe general parameters for an examiner as allowed by Section 1104(c)(2), but declined to take that step because the Appellants did not consent to the proposal without receipt of further elaboration, consent to which would have caused the order entered to be unappealable. The court then stated that "it was inequitable for the Debtors to have to defend against the Ad Hoc Committee's appeal of the denial of the appointment of an official shareholders' committee if — outside the appellate record — the Ad Hoc Committee obtained the appointment of an examiner to conduct the same valuation that the proposed official shareholders' committee would have undertaken." Id. In response to this suggestion that they withdraw their appeal, the Appellants equivocated, "stating that they would not want to relinquish their appeal until they were satisfied with the nature of the examiner's appointment and investigation." Id. Upon hearing this, the court decided it did not wish to negotiate and denied the Appellants' motion for an examiner.
The Bankruptcy Court's decision is reversed. On its face, Section 1104(c)(2) mandates the appointment of an examiner where a party in interest moves for an examiner and the debtor has $5,000,000 of qualifying debt. Furthermore, as Judge Drain noted prior to denying the LSPC's motion, "the legislative history of Section 1104(c)(2) reflects Congress's desire to provide extra protection to stockholders of public companies through the mechanism of an independent functionary." In re Loral, 313 B.R. at 585 (quoting In re Gilman Servs., Inc., 46 B.R. 322, 327 (Bankr. D. Mass. 1985)); see also 7 Collier ¶ 1104.03[2][b] at 1104-39 (reviewing legislative history of 11 U.S.C. § 1104(c)).
The Second Circuit has not yet considered whether this provision of the Bankruptcy Code is in fact mandatory. However, the Sixth Circuit, as well as a number of bankruptcy courts, has stated that it is. See In re Revco D.S., Inc., 898 F.2d 498, 500-01 (6th Cir. 1990) (holding that appointment of examiner is mandatory in view of the phrase "the court shall order"); In re UAL Corp., 307 B.R. 80, 86 (Bankr. N.D. Ill. 2004) (same); In re Mechem Financial of Ohio, Inc., 92 B.R. 760 (Bankr. N.D. Ohio 1988) (same); In re The Bible Speaks, 74 B.R. 511, 514 (Bankr. D. Mass. 1987) (same); In re 1243 20th Street, Inc., 6 B.R. 683, 685 n. 3 (Bankr. D.D.C. 1980) (same); In re Lenihan, 4 B.R. 209, 211 (Bankr. D.R.I. 1980) (same). In In re Revco, the Sixth Circuit reviewed the two alternatives created by Section 1104(c) and concluded that unless paragraph (c)(2) requires appointment of an examiner in cases exceeding the debt threshold, "it becomes indistinguishable" from paragraph (c)(1). In re Revco, 898 F.2d at 501. As stated inCollier on Bankruptcy, "Section 1104(c)(2) does not leave any room for the court to exercise discretion about whether an examiner should be appointed, as long as the $5,000,000 threshold is met and a motion for appointment of an examiner is made by a party in interest." 7 Collier ¶ 1104.03[2][b] at 1104-38.
The Court has reviewed the cases relied on by the Appellees, many of which are interpretations of Section 1104(c)(1) and not (c)(2). See In re Gliatech, Inc., 305 B.R. 832, 835 (Bankr. N.D. Ohio 2004); In re Sletteland, 260 B.R. 657, 671 (Bankr. S.D.N.Y. 2001); In re Gilman Servs., Inc., 46 B.R. 322, 327 n. 2 (Bankr. D. Mass. 1985); In re Bel Air Associates, Ltd., 4 B.R. 168, 172 (Bankr. W.D. Okla. 1980). The cases relied on by the Appellees that do interpret Section 1104(c)(2) are distinguishable. See In re Bradlees Stores, Inc., 209 B.R. 36, 39 (Bankr. S.D.N.Y. 1997) (denying motion under Section 1104(c)(2) based on finding of laches); In re Rutenberg, 158 B.R. 230, 233 (Bankr. M.D. Fla. 1993) (denying motion under Section 1104(c)(2) because debtor was an individual not a publicly held company). Although Judge Drain quotes the discussion in, Collier on Bankruptcy of the exceptional circumstance of laches in his review of the applicable law, see In re Loral, 313 B.R. at 586, he does not set forth any facts supporting a claim of laches nor does he state that he relied on laches for his decision. Furthermore, on argument Mr. Swarts gave reasons why the LSPC was unable to move sooner than May or August of 2004 on the issue of valuations; he also showed that the LSPC, in light of its pro se status, acted promptly. This is a pro se case and the Court should give the shareholders latitude.
A recent decision by the Bankruptcy Court for the Northern District of Illinois makes this conclusion clear when it observes: "[I]f paragraph (c)(2) were not mandatory, then § 1104(c) would have the following meaning: `If specified debt is less than $5 million, it is in the court's discretion to appoint an examiner; and if specified debt is more than $5 million, it is in the court's discretion to appoint an examiner.'" In re UAL Corp., 307 B.R. at 85 n. 2.
"It is well established that when a statute's language is plain, the sole function of the courts — at least where the disposition required by the text is not absurd — is to enforce it according to its terms." Lamie v. United States Trustee, 540 U.S. 526, 534 (2004) (citations omitted). In light of the straightforward language and legislative history of 11 U.S.C. § 1104(c)(2), this Court holds that the Bankruptcy Court had no discretion to deny appointment of an examiner where, as here, the $5,000,000 debt threshold is met and shareholders of a public company have moved for appointment of an examiner. See In re Revco, 898 F.2d at 501.
The Bankruptcy Court accurately stated that it is "well established that the bankruptcy court has considerable discretion in designing an examiner's role." In re Loral, 313 B.R. at 585 (citations omitted). Indeed, it is that court's duty to fashion the role of an examiner to avoid substantial interference with the ongoing bankruptcy proceedings. To that end, the Bankruptcy Court may exercise its discretion to limit the scope of the examiner's investigation and the compensation and expenses available to the examiner. See In re Revco, 898 F.2d at 501 (noting that "the bankruptcy court retains broad discretion to direct the examiner's investigation, including its nature, extent, and duration"); see also 7 Collier ¶ 1104.03[2][b] at 1104-39.
IV. CONCLUSION
For the foregoing reasons, the Bankruptcy Court's denial of the LSPC's motion to appoint an examiner is reversed and remanded to the Bankruptcy Court to appoint a qualified independent examiner. In this Court's view, the examiner should have an adequate budget and expertise to review whether appropriate procedures were followed in valuing Loral's assets, particularly the space-based assets. That appointment should take place within ten (10) days of this Order.
IT IS SO ORDERED.