Opinion
Case No. 02-13533 (AJG), (Jointly Administered)
May 16, 2003
MEMORANDUM DECISION AND ORDER DENYING MOTIONS FOR APPOINTMENT OF A CHAPTER 11 TRUSTEE AND EXAMINER
Before the Court are motions and various joinders for the appointment of a chapter 11 trustee or examiner for MCI Corporation ("MCIC") and the MCIC subsidiaries (collectively, with MCIC, "MCI") in the above-captioned cases of WorldCom, Inc., and certain of its direct and indirect subsidiaries. For the reasons that follow, the Court denies the motions.
I. Jurisdiction
The Court has subject matter jurisdiction of this matter under 28 U.S.C. § 1334(b) and 157(a) and the "Standing Order of Referral of Cases to Bankruptcy Judges" of the United States District Court, dated July 10, 1984 (Ward, Acting C.J.). This is a core proceeding as that term is defined by 28 U.S.C. § 157(b)(2).
II. General Background
On July 21, 2002 and November 8, 2002, WorldCom, Inc., and certain of its direct and indirect subsidiaries, including MCI (collectively, "WorldCom" or the "Debtor(s)"), commenced cases under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). By orders dated July 22, 2002 and November 12, 2002, the Debtors' chapter 11 cases have been consolidated for procedural purposes only and are being jointly administered. The Debtors continue to operate their businesses and manage their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. On July 29, 2002, the United States Trustee for the Southern District of New York (the "UST") appointed the statutory committee of unsecured creditors (the "Committee").
III. Factual Background
A. WorldCom, Inc., MCI and Intermedia
WorldCom, Inc., one of the Debtors in the above captioned cases, together with direct and indirect domestic subsidiaries and non-debtor foreign affiliates, is one of the world's largest global communications companies providing a broad range of communication services in over 200 countries on six continents. WorldCom expanded as a result of numerous mergers and acquisitions.
In September 1998, WorldCom, Inc. acquired MCI for $40 billion pursuant to a merger of MCIC with and into a wholly-owned subsidiary of WorldCom, Inc. In 1998, when WorldCom, Inc. acquired MCI, MCI was the fourth largest long distance telephone carrier in the United States, as well as the third largest carrier of international voice traffic worldwide. MCI enjoyed gross revenues of over $18.5 billion and assets in excess of $20 billion.
In September 2000, WorldCom, Inc. purchased Intermedia Communications, Inc. ("Intermedia"), a provider of integrated data and voice communication services. Thereafter, litigation ensued involving the purchase and on July 1, 2001, WorldCom, Inc. ultimately consummated the acquisition of Intermedia for approximately $5.8 billion, including the assumption of long-term debt pursuant to the merger of a wholly-owned subsidiary of WorldCom, Inc., with and into Intermedia.
B. Accounting Irregularities and Debtors' Response Thereto
On June 25, 2002, the Debtors announced that an internal audit had revealed accounting irregularities. After the accounting announcement, WorldCom, Inc.'s board of directors formed a special committee (the "Special Committee") to conduct an independent investigation. The members of the Special Committee included a former United States Attorney General and a former head of enforcement at the United States Securities and Exchange Commission (the "SEC").
On June 26, 2002, in response to the Debtors' June 25, 2002 disclosures, the SEC commenced an enforcement action against WorldCom, Inc. for violations of various securities laws. The Debtors cooperated with this and other governmental investigations into their affairs. On June 28, 2002, the United States District Court for the Southern District of New York approved a stipulation and order providing for the appointment of a corporate monitor ("Corporate Monitor"). On July 3, 2002, the district court appointed Richard C. Breeden, a former chairman of the SEC, as Corporate Monitor with the consent of WorldCom, Inc. and the SEC. Pursuant to the June 28, 2002 order and subsequent orders entered by the district court, the Corporate Monitor is charged with, inter alia, overseeing the document retention policies of WorldCom, approving all compensation and similar payments to employees and any outside professionals or advisors, working with the Debtors regarding corporate governance to ensure the highest level of corporate integrity, and attending board meetings.
The Debtors filed the first bankruptcy petition electronically on Sunday, July 21, 2002. The following day, upon the request of the UST and with the consent of the Debtors, this Court directed the appointment of an examiner to investigate "any allegations of fraud, dishonesty, incompetence, misconduct, mismanagement or irregularity in the arrangement of the affairs of any of the Debtors by current or former management, including but not limited to issues of accounting irregularities." See Order Granting the Motion of the United States Trustee for the Appointment of an Examiner, dated July 22, 2002 (the "Examiner Order"). The Examiner Order further provided that in conducting its investigations, the examiner was to use best efforts to coordinate with and avoid unnecessary duplication of any investigations being conducted by the United States Department of Justice, the SEC, the Corporate Monitor or any other governmental agencies. On August 6, 2002, this Court approved the selection of Dick Thornburgh, former Attorney General of the United States and Governor of Pennsylvania, as the examiner (the "Examiner"). The Examiner issued his first interim report on November 4, 2002 and is expected to issue his next report in the near future.
On July 29, 2002, the UST appointed the Committee, which is currently comprised of 14 members representative of the broad spectrum of the Debtors' creditors, including bondholders and indenture trustees of WorldCom, Inc., MCIC, and Intermedia, as well as MCI trade creditors. The members of the Committee are as follows:
Member Interest Metropolitan West Asset Management LLC WorldCom, Inc. Bondholder Cerberus Capital Management, L.P. WorldCom, Inc. Bondholder Blue River, LLC WorldCom, Inc. Bondholder ESL Investments WorldCom, Inc. Bondholder Wilmington Trust Company, as Indenture WorldCom, Inc. Bonds Trustee Deutsche Bank AG WorldCom Bank Lender WorldCom, Inc. Bank Lender ABN AMRO Bank N.V. WorldCom, Inc. Bank Lender Law Debenture Corporate Services, Inc., as MCI Bonds Indenture Trustee Metropolitan Life Insurance Company MCI Bondholder New York Life Investment Management LLC MCI Bondholder Elliot Management Corp. MCI Bondholder Electronic Data Systems Corporation MCI Trade Creditor AOL Time Warner, Inc. MCI Trade Creditor Sun Trust Bank, as Indenture Trustee Intermedia Bonds At least six of the 14 members of the Committee are creditors of MCI. Thus, over 40% of the Committee in number is made up of MCI creditors.In addition to the Committee, a number of informal committees have been active throughout the chapter 11 cases. These informal, or ad hoc committees, include an informal committee representing bondholders of MCIC (the "Ad Hoc MCI Committee"), an informal committee representing bondholders of WorldCom, Inc. (the "Ad Hoc WorldCom Committee"), and an informal committee representing bondholders of Intermedia Communications Inc. (the "Ad Hoc Intermedia Committee" and collectively with the Ad Hoc MCI Committee and the Ad Hoc WorldCom Committee, the "Ad Hoc Committees"). In addition, other creditors, including MatlinPatterson Global Opportunities Partners L.P., MatlinPatterson Phoenix SPV L.L.C., Silver Lake Phoenix LLC, and Bain Capital (collectively, the "MatlinPattersonGroup"), which hold significant claims against the Debtors, have actively participated in the chapter 11 cases.
On April 29, 2002, Bernard Ebbers resigned as the Debtors' chairman and chief executive officer ("CEO") and was replaced by John Sidgmore (the Debtors' then vice chairman) as interim CEO. On September 10, 2002, the Debtors announced that they were actively seeking a permanent CEO to replace John Sidgmore. The Debtors' decision to commence a search for a permanent CEO was done, in part, at the urging of the Committee. The Committee recognized a pressing need for permanent leadership distinct from the Debtors' current and prior management to quell public perception about the Debtors' financial incongruities, stability and ongoing businesses. It was viewed as critical to secure independent and new leadership to ensure the successful restructuring efforts of the Debtors. In September 2002, the Debtors retained the search firm SpencerStuart to assist the Debtors (through the Search Committee of WorldCom, Inc.'s board of directors) in identifying a new CEO. The Committee formed a Search Subcommittee which participated in the interview and selection process. The Search Subcommittee of the Committee was comprised of five members, and included Elliot Management Corp., an MCIC bondholder, and Electronic Data Systems Corporation, an MCI trade creditor.
After an extensive screening process, the Debtors and the Search Subcommittee of the Committee determined that Mr. Michael Capellas was the most qualified person to assume the role of CEO. On December 9, 2002, the Debtors filed a motion seeking authorization to employ Mr. Capellas as CEO and Chairman of WorldCom, Inc.'s board of directors. The motion was supported by the Committee and approved by the district court and this Court on December 16, 2002.
On October 15, 2002, this Court entered an order authorizing the Committee to retain a forensic accountant to, among other things, (i) analyze and determine the appropriateness of the Debtors' accounting journal entries and other record keeping methods relating to inter/intra company transactions between their various legal entities, (ii) obtain and review the Debtors' intercompany account balances and any reconciliations that may be required, (iii) analyze the Debtors' historical financings and acquisitions and determine the appropriateness of those transactions on a legal entity-by-entity basis, and (iv) review with the Debtors' management and gain an understanding of the Debtors' operating practices and policies including the Debtors' cash management system and inter/intra company transactions.
On November 26, 2002, the Debtors consented to the entry of a permanent injunction which partially addressed the SEC litigation. Pursuant to the partial settlement, the Debtors agreed (i) not to violate securities laws in the future, (ii) to provide reasonable training and education to their senior operational officers and financial reporting personnel to minimize the possibility of future violations, (iii) to conduct a review of the effectiveness of its material internal accounting control structure and policies, and (iv) that following consideration of the Special Committee's report, the Corporate Monitor would submit recommendations concerning the Debtors' ongoing corporate governance and ethics policies.
On December 17, 2002, all of the members of the Debtors' board of directors serving prior to the announcement of the accounting irregularities resigned. All the members of the Debtors' current board of directors were appointed subsequent to the aforementioned announcement. On January 14, 2003, the Debtors, via web broadcast, announced the 100-Day Initiative. Pursuant to the 100-Day Initiative, the Debtors proposed to (i) launch new consumer and business products and services, (ii) aggressively address the small-to medium-sized business market, (iii) implement cost reduction plans, (iv) implement additional corporate integrity initiatives, including the establishment of a new corporate leadership structure whereby the Debtors' business market and mass market sales, international operations, strategy and marketing operations and technology, human resources, finance, accounting and legal functions all report directly to the CEO, (v) prepare one-year and three-year business plans, and (vi) file a plan of reorganization by April 14, 2003. Due to the efforts of the Debtors' new management team, the Debtors successfully completed the 100-Day Initiative.
C. The Proposed Plan and Disclosure Statement and the Instant Motions
On April 14, 2003, the Debtors filed a proposed plan of reorganization (the "Plan") and a related disclosure statement (the "Disclosure Statement"). A hearing on the adequacy of the Disclosure Statement currently is scheduled for May 19, 2003. No hearing has been scheduled for confirmation of the Plan.
The Plan substantively consolidates the estates of the WorldCom Debtors (which the Plan defines as each of the chapter 11 debtors, other than the Intermedia Debtors) and the Intermedia Debtors, respectively. According to the Disclosure Statement, the Plan represents a compromise and settlement of issues regarding substantive consolidation raised by the Ad Hoc Committee of MCIC Senior Notes Holders and makes special provision in the treatment of the MCIC Senior Debt Claims (as such term is defined in the Plan) to take into account the reliance of the holders of such claims in extending credit to MCIC prior to its merger with WorldCom. In addition, the Plan embodies a compromise and settlement of certain issues with respect to the recharacterization of a certain Intermedia intercompany note, an Intermedia fraudulent transfer claim, and an Intermedia preference claim, which compromise and settlement affects the recovery of creditors of the Intermedia Debtors.
On April 17, 2003, the Ad Hoc MCI Trade Claims Committee (the "MCI Trade Committee") filed a Motion for the Appointment of a Chapter 11 Trustee for MCI Communications Corporation and its Subsidiaries (the "MCI Trade Committee Motion"). On April 21, 2003, the Dissenting MCI Bondholders (the "Dissenting MCI Bondholders" and, together with the MCI Trade Committee, the "Movants") filed a Motion to Appoint a Limited Purpose Chapter 11 Trustee for MCI Communications Corporation and its Subsidiaries (the "Dissenting MCI Bondholder Motion").
The MCI Trade Committee consists of secondary purchasers of various trade claims of two Debtor entities, MCI WorldCom Network Services, Inc. and MCI WorldCom Communications, Inc.,
The Dissenting MCI Bondholder Committee primarily consists of holders of the preferred stock instruments issued by MCI Capital I, a non-Debtor affiliate of MCIC.
IV. Legal Standard
Section 1104(a) of the Bankruptcy Code provides that a chapter 11 trustee shall be appointed:
(1) for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management either before or after the commencement of the case, or similar cause, . . .; or
(2) if such appointment is in the interests of creditors, any equity security holders, and other interests of the estate.
The party seeking appointment of the trustee has the burden of showing, by clear and convincing evidence, cause under section 1104(a)(1) or the need for a trustee under section 1104(a)(2). In re Marvel Entertainment Group, Inc., 140 F.3d 463, 471 (3d Cir. 1998); In re Ionosphere, 113 B.R. 164, 168 (Bankr.S.D.N.Y. 1990). The decision to appoint a trustee in a chapter 11 proceeding is a factual determination left to the discretion of the bankruptcy judge. See Schuster v. Dragone (In re Dragone), 266 B.R. 268, 271 (D.Conn. 2001).
The appointment of a chapter 11 trustee is recognized as an extraordinary remedy because there is a strong presumption that the debtor should remain in possession. See Ionosphere, 113 B.R. at 167. This presumption is premised upon the familiarity that the debtor in possession has with the business it manages at the time of the filing, thereby making it the best party to conduct the debtor's business during reorganization. Marvel, 140 F.3d at 471. The presumption is also premised on the fiduciary duty owed to creditors, which presupposes that the debtor in possession will conduct the affairs of the estate in a manner beneficial to creditors. Id. at 471, 474. Section 1104(a)(1) authorizes the appointment of a trustee "for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management either before or after the commencement of the case, or similar cause. . . ." 11 U.S.C. § 1104(a)(1) (emphasis added). This provision of the Bankruptcy Code provides a non-exclusive list of what may constitute cause. See 11 U.S.C. § 102(3) (providing that the terms "includes" or "including" are not limiting). Each factor listed as "cause" to appoint a trustee "`cover[s] a wide range of conduct'" giving the court discretion to determine if cause exists. Marvel, 140 F.3d at 472. It is generally recognized that there is some degree of prepetition mismanagement and incompetence in every bankruptcy case.
Therefore, a showing of more than simple mismanagement or incompetence is required to appoint a trustee. See, e.g., In re Evans, 48 B.R. 46, 47 (Bankr.W.D.Tex. 1985). As the text of the Bankruptcy Code suggests, "the focus [under 1104(a)(1)] is on the debtor's current activities, not past misconduct." In re Sletteland, 260 B.R. 657, 671-72 (Bankr.S.D.N.Y. 2001). Thus, it follows that where current management is not implicated by a debtor's prior misdeeds, there may be no legal basis for the imposition of a trustee under section 1104(a)(1).
Similarly, section 1104(a)(2) authorizes the appointment of a trustee if "such appointment is in the interests of creditors, any equity security holders and other interests of the estate." 11 U.S.C. § 1104(a)(2). This provision envisions a flexible standard, Marvel, 140 F.3d at 474, necessitating that the court resort to its broad equitable powers. Dragone, 266 B.R. at 272. In exercising equitable powers, a court should avoid rigid absolutes and instead focus upon the practical aspects of a given case. See Dragone, 266 B.R. at 272-73 ("In equity, courts eschew rigid absolutes and look to the practical realities and necessities inescapably involved in reconciling competing interests. Moreover, equitable remedies are a special blend of what is necessary, what is fair and what is workable.") (internal quotation marks omitted). Under section 1104(a)(2), a creditor group, no matter how dominant, cannot justify the appointment of a trustee simply by alleging that it would be in its interests. Sletteland, 260 B.R. at 672. Indeed, as it has been noted:
[I]t is important to remember that the "interests" standard requires a finding that appointment of a trustee would be in the interest of essentially all interested constituencies. . . . Use of the word "and" [in the text of section 1104(a)(2)] suggests that creditors cannot on their own obtain the appointment of a trustee under the provision in order to disenfranchise equity security holders or other interests. Instead, appointment of a trustee must be in the interest of the estate generally in order to satisfy the statutory "interest" standard.
7 Alan N. Resnick Frank J. Sommer, Collier on Bankruptcy 1104.02 [3][d][i] (15th ed. rev. 2003). The traditional factors used to determine the propriety of a trustee under subsection (a)(2) include:
(i) the trustworthiness of the debtor;
(ii) the debtor's past and present performance and prospects for rehabilitation;
(iii) the confidence of the business community in the debtor; and
(iv) whether the benefits of a trustee outweigh the costs.
Ionosphere, 113 B.R. at 168.
Although a full evidentiary hearing is not required, Ionosphere, 113 B.R. at 167, in this matter the Court conducted a full evidentiary hearing on May 15, 2003.
V. Discussion
Although the Court has not addressed herein every argument raised by the parties, the Court has considered all such contentions and has determined that such are either irrelevant or immaterial to the ultimate decision of the Court.
A. The Appointment of a Chapter 11 Trustee
1. The Movants Argue that Cause Exists to Satisfy Section 1104(a)(1)
The Movants' contentions can be distilled to the following arguments that allegedly justify the appointment of a trustee under section 1104(a)(1): (i) the proposal by the Debtors of a Plan that provides for substantive consolidation and the concomitant elimination of intercompany claims; (ii) the filing of consolidated schedules of assets; and (iii) the Debtors' negotiation of a consensual Plan. In addition, the Joint Reply can be distilled to the following argument: that Debtors' alleged failure to adequately investigate better economic terms for MCI creditors, as evidenced by the proposed terms of the Plan, warrants the imposition of a chapter 11 trustee.
Initially, the Movants had relied on prepetition misconduct by former management as a justification for the appointment of a trustee. However, at the hearing, the Movants focused only on the Debtors' postpetition conduct. As previously discussed, in considering whether to appoint a trustee for cause under section 1104(a)(1), the focus is on evaluating the conduct of current management. Movants' arguments concerning current management will be addressed in connection with the economic terms of the Plan.
As a preliminary matter, the Court agrees with the Debtors' and Committee's assertions that the majority of arguments raised by the Movants are more properly characterized as objections to confirmation of the Plan. But for the economic terms of the Plan that include substantive consolidation of the MCI and the Worldcom Debtors, the Court can see no reason for the timing of the issues raised herein. Although Movants characterize their failure to act to preserve their rights until the eve of a disclosure statement and a plan confirmation hearing as an honest "mistake," based upon the entire record of this case, there is no basis for the Court to conclude that Movants "mistake" is anything but a calculated risk. The fact that they may have relied upon the Ad Hoc MCI Committee to generally protect their interests is of little consequence. At the outset of these cases, potentially conflicting issues related to intercompany debt between Worldcom, Inc. and MCI entities were readily apparent from the manner in which the businesses were conducted. The 100-day Initiative was well publicized and it was quite clear that Mr. Capellas was committed to file a plan by mid-April 2003. Therefore, the filing of a plan that addresses these issues should not have come as a surprise to the Movants, and hence they should have been more diligent in protecting their interests.
i. Movants Have Failed to Establish that the Plan as Proposed by the Debtors Providing for Substantive Consolidation Constitutes Cause for the Appointment of a Trustee
Movants contend that Debtors' failure to consider less harmful substantive consolidation alternatives is cause for the appointment of a trustee. According to Movants, WorldCom should have considered a three-entity substantive consolidation that would respect the alleged historic separateness of the WorldCom, Inc. and MCI Debtors.
According to WorldCom, Inc., the Debtors recognized early in these chapter 11 cases that, because they viewed their operations as integrated and because of the complex debt structure, the question of the substantive consolidation of some or all of the Debtors would need to be analyzed and decided. Accordingly, the Debtors assert that they began to examine the facts and research the law of substantive consolidation. The Debtors contend that shortly after the chapter 11 filing, the Debtors and their advisors discussed issues relating to substantive consolidation and the intercompany claims. In addition, the Debtors assert that their advisors addressed these issues with the Committee's professionals. The Debtors referenced its detailed time records evidencing activity through March 2003 by 34 attorneys who spent in excess of 1,150 hours analyzing the issues concerning substantive consolidation and intercompany claims.
The Debtors contend that during their investigation of the substantive consolidation issues, they concluded that it was necessary to review the intercompany claims to determine whether the Debtors' affairs could be disentangled. The Debtors further contend that in an effort to avoid delay and duplicative work, it was determined that the forensic accountants retained by the Committee would take the lead role in compiling, analyzing, and reporting on intercompany claims and underlying data. The Debtors maintain that this procedure was employed to enable the forensic accountants to determine whether it would be possible for the Debtors to produce accurate, separate financial statements for each of the Debtors' entities. The Debtors assert that certain other prepetition advisors worked with the forensic accountants in developing this information. On November 13, 2002, January 8, 2003, and March 12, 2003, respectively, the forensic accountants produced reports detailing their analyses of various legal entity and intercompany issues. In these reports, the forensic accountants indicated that the Debtors' accounting system does not contain all information that would enable the Debtors to reliably track intercompany information on a legal entity basis. In addition to the work performed by the Committee's forensic accountants, the Debtors assert that financial advisors to the Debtors and the Committee have analyzed the information from the Debtors' books and records in an effort to determine what recoveries would be available to various creditor constituencies under a number of assumptions. The Debtors further assert that the financial advisors analyzed the results of the forensic accountants' investigation as they relate to substantive consolidation and the impact of the intercompany claims.
It appears that the Movants disagree with the conclusions drawn by the Debtors after the Debtors' extensive investigation and analysis of the issues concerning substantive consolidation and intercompany claims. However, this disagreement is not the basis for the appointment of a trustee where it appears the Debtors have appropriately discharged their fiduciary duty in evaluating and analyzing these issues and have reached an informed conclusion.
The Movants argue that the Debtors did not fulfill their fiduciary duty because management did not consider a three-party substantive consolidation model with the MCI entities separately consolidated. It appears undisputed that Mr. Capellas did not personally review the three-party substantive consolidation model. However, Mr. Capellas relied on the advice of various professionals retained in these cases to reach his conclusions regarding substantive consolidation and other related issues. It is undisputed that some of these professionals considered the three-party substantive consolidation model. Whatever may be said about the three-party model and substantive consolidation, it appears that the Movants disagree with the conclusions drawn by the Debtors after the Debtors' investigation and analysis of the issues concerning substantive consolidation and intercompany claims. In this Court's view, this disagreement is not the basis for the appointment of a trustee where the Debtors have expended great efforts in a forthright evaluation and analysis of these issues leading the Debtors to ultimately reach an informed conclusion. The Movants opposition to the Debtors' conclusion to promote a two-entity substantive consolidation is more appropriately addressed in the context of considering confirmation of the Debtors' Plan.
ii. Movants Failed to Establish that Debtors Abandoned their Duties in this Case
Movants argue that a trustee is required because WorldCom has abandoned its duties. As support, Movants contrast WorldCom's alleged conduct to WorldCom's legal duties in these cases as represented in the following chart:
Code/Rule WorldCom's Alleged Conduct That Justifies A Trustee 1) Section 521(1) and Bankruptcy Rule 1007: WorldCom Debtors refuse to file schedules of Debtor/Trustee must file schedules. assets for MCI. 2) Section 704(5): Object to the allowance of WorldCom Debtors refuse to examine claims any claim that is improper. against MCI and have no intention of objecting to claims against MCI that benefit WorldCom Debtors. 3) Section 704(7): Furnish such information WorldCom Debtors refuse to divulge the basis concerning the estate as is requested by a party for intercompany claims, or which subsidiaries in interest. allegedly own them. WorldCom Debtors also have not divulged any reason for treating them as valid claims. 1) Movants' allege that WorldCom refuses to file schedules of assets for MCI. In response to Movants' argument, the Debtors contend that they have filed schedules. On April 14, 2003, the Debtors filed their schedule of assets, which primarily consist of an unaudited schedule of assets for all of the Debtors other than Intermedia Communications, Inc. and its subsidiaries. On May 7, 2003, in order to ensure compliance with section 521 of the Bankruptcy Code and to provide the most accurate disclosure of assets possible, the Debtors filed amendments to their schedule of assets. The amendments consist of approximately 46,500 pages detailing the real and personal property owned by the consolidated Debtors. According to Debtors, they have filed the best, most accurate schedules that they can file, given the realities of this case and the state of the books and records of the 222 Debtors. The Debtors and the Committee believe that with the filing of the amendments to the schedule of assets, the Debtors have made the proper disclosure of their assets as required under section 521 of the Bankruptcy Code and the applicable Bankruptcy Rules.The Court agrees with the Debtors and the Committee. The suggestion by the Movants that the filing of consolidated schedules is a refusal to file schedules for MCI is misplaced. It was plainly evident from the hearing that the Debtors' purported failure to file independent schedules of assets attributable to MCI is not a dereliction of duty but simply a manifestation of the size and complexity of the issues in these cases. Thus, Movants have failed to convince this Court that a trustee is needed to ameliorate the situation.
2) Movants' allege that WorldCom refuses to examine claims against MCI and has no intention of objecting to claims against MCI that benefit WorldCom itself. In response, Debtors point to the numerous hours spent by professionals, including counsel for the Debtors, considering these issues. For the same reasons outlined in section V.A.1.i. herein, the Court finds that Movants have failed to meet its burden. Accordingly, there is no basis from which the Court can conclude that Debtors have failed to fulfill its obligations under section 704(5) of the Bankruptcy Code.
3) Movants allege that WorldCom refused to furnish information concerning the estate and the estate's administration as requested by Movants. Specifically, Movants charge that Debtors did not divulge the basis for intercompany claims or which subsidiaries own them, or the reasons for treating them as valid claims. The Debtors respond that WorldCom spent thousands of hours identifying and mapping these intercompany balances. Beyond employing WorldCom's own professionals, finance, tax and accounting personnel, the Debtors worked closely with the Committee's forensic accountants to produce a matrix summarizing information to the extent possible at the time. In addition, the forensic accountants completed three reports which were shared with the Debtors and major creditor constituents.
The objection of the Debtors and the Committee to the admission of paragraphs 9-21 of the Affidavit of Steven D. Pohl in support of the Ad Hoc MCI Trade Claims Committee's Motion for the Appointment of a Chapter 11 Trustee for MCI Communications Corporation and its Subsidiaries (the "Pohl Affidavit") is sustained and the Pohl Affidavit is not admitted into evidence.
The admission of the Pohl Affidavit would contradict the understanding that the parties to this action arrived at concerning evidentiary procedures. Given the eleventh hour introduction of the Pohl Affidavit, neither the Debtors or the Committee was able to depose Pohl or to offer their own responsive affidavit.
Moreover, the fact that Movants' counsel did not address the alleged discovery issues to the Court prior to the submission of the Pohl Affidavit leads the Court to conclude that these issues are immaterial and without merit.
The Debtors noted that they faced considerable obstacles in assembling a reliable account of intercompany claims. WorldCom had never maintained their records on a legal entity basis, and had therefore never summarized the intercompany balances among subsidiaries. Furthermore, internal controls for properly recording activity by separate legal entity had never been established, nor were intercompany balances a focus of management review or control. Additional difficulties stemmed from the loss of institutional knowledge resulting from the termination of many of those in prepetition management, and from the questionable veracity of accounting information dealing with prepetition activity. Despite these shortcomings, the Debtors have argued that the intercompany matrix produced by the forensic accountants is as accurate a report as possible under the circumstances. The forensic accountants' matrix ultimately formed the foundation for a "distribution model" built by the Committee's financial advisors.
Movants have not established that WorldCom has failed to fulfill its duties pursuant to Section 704(7) of the Bankruptcy Code to furnish such information concerning the estate and the estate's administration as required by the Movants. The Court recognizes that significant obstacles exist in accurately recreating a map of these complex intercompany claims. However, the Court believes that, given the circumstances, Movants had access to the most comprehensive information available. The Court does not believe that the appointment of a chapter 11 trustee is needed to ensure that Movants continue to receive accurate information from the Debtors, or that the Debtors' disclosure to date is insufficient, rendering necessary the appointment of a trustee.
iii. Alleged Solicitation of Votes
Movants allege that the Debtors have entered into an agreement with the MCIC Bondholders that would accord the bondholders a substantial premium over the treatment they might otherwise realize in a substantive consolidation of the Debtors. Movants further allege that this treatment is only available to MCI Bondholders if they agree to withdraw as members of the MCI Trade Committee and agree that they will not contest the Plan in their capacity as holders of MCI trade claims or of MCIC subordinated debt claims. Movants argue that Debtors' alleged conduct amounts to improper solicitation of acceptances to the Plan pursuant to section 1125(b) of the Bankruptcy Code.
Debtors respond that WorldCom did not solicit acceptances to the Plan in violation of section 1125(b). Debtors claim that there is no written agreement among the Debtors and any constituency in this case to support the Plan, and that discussion between the Debtors and any constituency on the Plan occurred in the context of plan negotiations rather than acceptance solicitations.
Section 1125(b) provides that:
An acceptance or rejection of a plan may not be solicited after the commencement of the case under this title from a holder of a claim or interest . . . unless, at the time of or before such solicitation, there is transmitted to such holder the plan or a summary of the plan, and a written disclosure statement approved, after notice and a hearing, by the court as containing adequate information. . . .
A majority of courts have adopted a narrow reading of "solicitation" for purposes of section 1125(b). In re Clamp-All Corp., 233 B.R. 198, 205 (Bankr. Mass. 1999); Century Glove, Inc. v. First American Bank of New York, 860 F.2d 94, 101 (3d Cir. 1988) ("A broad reading of [section] 1125 can seriously inhibit free creditor negotiations."); In re Snyder, 51 B.R. 432, 437 (Bankr. D. Utah 1985) ("The terms `solicit' and `solicitation,' as used in [section] 1125(b) of the [Bankruptcy] Code, must be interpreted very narrowly to refer only to a specific request for an official vote either accepting or rejecting a plan of reorganization."); Snyder, 51 B.R. at 437 ("The terms [`solicit' and `solicitation'] do not encompass discussions, exchanges of information, negotiations, or tentative arrangements that may be made . . . which may lead to the development of a disclosure statement or plan of reorganization, or information to be included therein. If these activities were prohibited by [s]ection 1125(b), meaningful creditor participation would cease to exist.").
This Court agrees that, as a general principal, a narrow reading of the term "solicitation" in relation to section 1125(b) is essential to promote a consensual reorganization process. A narrow reading "avoids a chill on debtors' postpetition negotiations with their creditors, one which otherwise might prove devastating to the reorganization process." In re Kellogg Square P'ship, 160 B.R. 336, 340 (Bankr.D.Minn. 1993). Given the narrow reading generally applied to the term "solicitation" as used in section 1125, and based upon the facts presented regarding the alleged solicitation of acceptances by the Debtors, it is likely that the Debtors' actions would be deemed plan negotiations as opposed to solicitations in this instance. However, the Court need not rule on this issue at this time. The issue presently before the Court is whether Debtors' conduct is an element of cause warranting the appointment of a chapter 11 trustee. The Court holds that Debtors' conduct does not support Movants' motion to appoint a chapter 11 trustee.
Even if this Court determined that the Debtors had improperly solicited acceptances to the Plan, it is this Court's view that,
a party in interest who seeks to obtain relief from an improper solicitation under the Bankruptcy Code must obtain such relief in accordance with the provisions of the [Bankruptcy] Code. Pursuant to 11 U.S.C. § 1126(e), the exclusive relief afforded under the [Bankruptcy] Code is to have such improperly solicited acceptance or rejection disregarded for purposes of computing the vote of the plan.
In re Texaco, 81 B.R. 813, 816 (Bankr.S.D.N.Y. 1988); see also In re Allegheny International, Inc., 118 B.R. 282, 293 (Bankr.W.D.Penn. 1990).
Section 1126(e) states that:
On request of a party in interest, and after notice and a hearing, the court may designate any entity whose acceptance or rejection of such plan was not in good faith, or was not solicited or procured in good faith or in accordance with the provisions of this title.
Since the Bankruptcy Code provides an exclusive remedy for the improper solicitation of acceptances to a plan, the appointment of a chapter 11 trustee would not be an appropriate remedy in the case at hand even if the Debtors had solicited improperly acceptances to the Plan.
iv. Summary
The Court concludes that the Movants have not established by clear and convincing evidence that cause exists to appoint a trustee pursuant to 11 U.S.C. § 1104(a)(1).
2. Movants Are Unable To Satisfy Section 1104(a)(2) Standard
For substantially the same reasons, the Court finds that Movants have failed to establish by clear and convincing evidence that a trustee is required under section 1104(a)(2). There are simply too many interests with a stake in MCI that actually support the Debtors' efforts for the Court to find that the appointment of a chapter 11 trustee is in the interests of all creditors as the Bankruptcy Code requires. Nevertheless, the Court will discuss the factors outlined in Ionosphere, 113 B.R. at 168.
i. Trustworthiness
The Debtors' trustworthiness is no longer at issue. Debtors have hired a new CEO and have replaced their board of directors. Further, the Court is not aware of any criticism of the Debtors' business practices during postpetition period and the Debtors have worked diligently with creditors' constituencies in furtherance of their reorganizational goals.
ii. Prospects
The Debtors have made progress with respect to their business plan, are expanding their customer base and are moving toward a successful reorganization.
iii. Confidence
The appointment of a trustee to propose a plan for MCI would reduce, not enhance, creditor and customer confidence in the Debtors and their businesses. In fact, an order of this Court appointing a trustee in any of the Debtors' cases would constitute an event of default under the Debtors' postpetition credit facility. Such an event of default would give the Debtors' postpetition lenders the right to accelerate any outstanding balances and terminate the facility. With this knowledge, creditors and suppliers would be reluctant to provide the Debtors with trade credit, critical goods, and services, rendering the Debtors unable to properly serve their customers and without any ability to finance working capital requirements. For many customers, WorldCom provides the backbone of their business, and the Debtors' inability to serve such customers, including the United States government, could prove devastating. The
unsettling effect of a trustee would be detrimental for the Debtors and all parties in interest, including the Movants.
iv. Cost-Benefit Analysis
The appointment of a trustee would be very costly to the Debtors and their estates, with no apparent benefit. Given the size and complexity of the Debtors and their operations, the delay and expense that would be caused by the trustee's (and new professionals') need to learn about the Debtors' assets, liabilities, businesses, and chapter 11 cases would be substantial and would likely seriously and adversely affect the prospects of rehabilitation. The appointment of a trustee would severely impede the Debtors' ability to confirm a consensual chapter 11 plan of reorganization within the next few months. As been stated previously in this decision, the issures raised by the Movants throughout are most appropriately addressed in the context of the Plan confirmation process.
v. Summary
The best interests of the WorldCom Debtors and the MCI Debtors taken either separately or combined are not served by the appointment of a trustee.
C. Appointment of an Examiner is Not Warranted
The Court finds that the MCI Trade Committee's motion for appointment of an examiner is not warranted. Section 1104(c) of the Bankruptcy Code does not require that the Court appoint another examiner where the mandatory prong of subsection (c)(2) of section 1104 has already been satisfied with the appointment of an examiner in the case. The general provision of subsection (c) of section 1104 simply requires that the Court "order the appointment of an examiner to conduct such an investigation of the debtor as is appropriate" (emphasis added). The Court finds that this language provides it with broad discretion to either expand the role of the Examiner to address issues raised during the proceeding or to appoint another examiner to address such issues.
The Court finds that expanding the scope of the Examiner's authority or appointing another examiner likely would cause the Debtors to incur substantial and unnecessary expenses detrimental to the interests of creditors and other parties in interest. The Court also finds that since the confirmation process has already begun in this case, another appointment would cause undue delay of that process and thereby would likely have a negative impact on all of the Debtors in the marketplace. Further, the Court finds that, at this juncture in the case, the issues that the MCI Trade Committee would like to have another examiner address are more appropriately raised in the context of the confirmation process. Accordingly, the MCI Trade Committee's alternative relief seeking the appointment of an examiner is denied.
VI. Conclusion
Upon consideration of all the arguments raised by the parties and the entire record of this case, the motions and any joinders thereto are DENIED.
SO ORDERED.