Opinion
No. 88-448.
May 31, 1988.
Jurisdiction — Related Proceedings — Injunctions — Shareholders' Meeting. — An action by a party (here, the creditors' committee) to enjoin a meeting of the shareholders of a debtor-in-possession is a related proceeding since state law provides the rule for decision and the action could be maintained absent the bankruptcy.
See 28 U.S.C. § 157 at ¶ 4030 and 28 U.S.C. § 1334 at ¶ 4101.
Reorganization — Injunctions — Shareholders' Meeting. — A meeting of the shareholders of a debtor-in-possession was denied since the proponent failed to establish that a "clear abuse" would occur if the meeting were held. The bankruptcy court had relied on the effect of the proxy battle on the 120-day exclusivity period within which only a debtor-in-possession may propose a plan, the fact that the proxy battle was being waged by a self-serving election committee, and to a lesser extent, that the costs of the proxy battle were depleting the estate. The district court discussed and essentially discounted the impact of these threats to the reorganization process. The court added: "It . . . is true that, in bankruptcy, the interests of shareholders, to some extent, become subordinated to the interests of creditors. Nevertheless, the ability of shareholders to exercise their right to corporate governance cannot be enjoined simply on the basis that a group of shareholders may be successful in their bid to elect directors whose views concerning a plan of reorganization may differ from those of existing management . . . . In summary, it is not the proper role of this Court to interfere in corporate democracy absent a compelling showing of need."
See Sec. 105 at ¶ 7045.
The instant matter commenced in the Bankruptcy Court with the filing of a complaint, by the Official Committee of Unsecured Creditors of Allegheny International, Inc., requesting that the May 20, 1988 annual meeting of the shareholders of Allegheny International be enjoined. On May 16, 1988, the Bankruptcy Court issued an order, accompained by neither factual findings nor an opinion setting forth the basis for its ruling granting the requested relief and enjoining the annual meeting for a period of ninety days from May 20, 1988, or until further order of the Bankruptcy Court.
The Official Committee of Equity Security Holders of International, Inc., and Spear, Leeds and Kellogg filed an immediate appeal to this Court seeking review of the Bankruptcy Court's order. The following day, May 17, 1988, appellants filed with this Court an emergency motion for a stay of the order pending disposition of the appeal.
The Equity Committee, Election Committee, and Spear, Leeds and Kellogg are collectively referred to herein as "appellants."
Upon receipt of appellants' motion for a stay, this Court convened a hearing to determine whether the requested relief should be granted. During the course of the hearing, it became apparent that meaningful review of the Bankruptcy Court's order would be impossible in the absence of factual findings or a memorandum opinion from the Bankruptcy Court setting forth the basis for the grant of injunctive relief. It further became apparent that no consideration had been given to the posting of a bond in connection with the injunction, as required by Bankruptcy Rules. The parties represented to this Court that these defects could be remedied within a short period of time, and further stated that an attempt would be made to provide this Court with a transcript of the proceedings before the Bankruptcy Court. In light of these factors, it being apparent to this Court that deficiencies in the Bankruptcy Court's order existed, a stay of the order was granted, pending a hearing on the merits scheduled for the following day, May 18, 1988.
On May 17, 1988, the Bankruptcy Judge entered a memorandum opinion setting forth the reasoning underlying the May 16th order.
The proper scope of review applied by a District Court in the context of an appeal from an order of the Bankruptcy Court is dependent upon a characterization of the Bankruptcy Court proceedings as either "core" or "noncore."
The district court is required to apply a "clearly erroneous" standard when reviewing determinations in core proceedings. In re Meyertech Corporation, 831 F.2d 410 (3d Cir. 1987). Non-core matters are subject to de novo review. 28 U.S.C. § 157(c)(1). Thus, in order to determine the standard by which this Court should examine the Bankruptcy Court's ruling, it became necessary to determine whether the adversary action was a core or non-core proceeding.
Title 28 U.S.C. § 157 provides in pertinent part as follows:
(b)(1) Bankruptcy judges may hear and determine all cases under Title 11 and all core proceedings arising under Title 11, or arising in a case under Title 11, referred under subsection (a) of this section and may enter appropriate orders and judgments, subject to review under § 158 of this Title.
Section 157(b)(2) provides that core proceedings include, but are not limited to, such matters as those concerning administration of the estate and other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor/creditor relationship. 28 U.S.C. § 157(b)(2)(A) and (b)(2)(o).
In addition, § 157(b)(2) provides that core proceedings include matters directly connected with a administration of the estate, such as allowance or disallowance of claims, orders to turn over estate property, proceedings to determine, avoid, or recover preferences, and the like. It is apparent that the only provisions of § 157(b) arguably applicable here are subsections (b)(2)(A) and (b)(2)(O).
Section 157 is the congressional response to the Supreme Court's decision in Northern Pipeline Construction Co. v. Marathon Pipeline Co., 458 U.S. 50 (1982), in which the Court held that a Bankruptcy Court could not constitutionally adjudicate a debtor's state law claim, because the grant of jurisdiction to the Bankruptcy Court under the 1978 Bankruptcy Act was impermissibly broad. Specifically, Marathon holds that Congress cannot vest Article III powers in bankruptcy judges, since bankruptcy judges do not enjoy life tenure and the accompanying privileges enjoyed by Article III judges. The Marathon Court did hold, however, that congress may vest power in the Bankruptcy Court to adjudicate matters directly related to bankruptcy.
Justice Brennan, writing for the plurality in Marathon, described the distinction between those powers which may constitutionally be exercised by the Bankruptcy Court and those which may not, as follows: "[T]he restructuring of debtor-creditor relations, which is at the core of the federal bankruptcy power, must be distinguished from the adjudication of state-created private rights. . . . [Such rights] may be adjudicated in federal court on the basis of [their] relationship to the petition for reorganization . . . . But this relationship does not transform the state-created right into a matter between the government and the petitioner for reorganization. Even in the absence of the federal scheme, the plaintiff would be able to proceed against the defendant on the state law . . . claims." 458 U.S. at 71-72 and n. 26.
Justice Brennan went on to note that, under the Act, the broad range of cases which could be brought into Bankruptcy Court as being "related to" bankruptcy proceedings, threatened a serious erosion of powers reserved to the Judicial Branch by Article III. Congress may not constitutionally delegate to non-Article III judges the power to adjudicate rights not created by congress, i.e., state-created rights. 458 U.S. at 81-82.
In the case of In Re Matter of Wood, 825 F.2d 90 (5th Cir. 1987), the Court, discussing the Marathon decision, held as follows:
Two points are suggested . . . . First, bankruptcy judges may exercise full judicial power over only those controversies that implicate the peculiar rights and powers of bankruptcy, or . . . controversies "at the core of the federal bankruptcy power." Second, controversies that do not depend on the bankruptcy laws for their existence — suits that could proceed in another court even in the absence of bankruptcy — are not core proceedings.
Given these constitutional principles, the Fifth Circuit held that a reading of § 157(b)(2)(O) which would equate the phrase "proceedings affecting . . . the estate" with the phrase "proceedings having a conceivable effect [on the estate]" would run contrary to the dictates of the Marathon decision.
The holding of In re Wood is consistent with dicta in the Third Circuit's opinion in In Re Meyertech Corporation, 831 F.2d 410 (3d Cir. 1987). Referring to the language of §§ 157(b)(2)(A) and 157(b)(2)(O), the Circuit noted that "it is difficult to perceive of a proceeding which would not fall under the all encompassing language of either [of these two provisions] . . . . An expansive interpretation of these provisions may lead to some seemingly incorrect and overbroad results regarding core proceedings . . . . An overbroad interpretation of core proceedings . . . might allow the bankruptcy judge to enter final judgment on matters previously found to be an unconstitutional exercise of jurisdiction under Marathon." 831 F.2d at 416.
In In Re Johns-Manville Corporation, 801 F.2d 60 (2nd Cir. 1986), the Court held that a proceeding involving the enjoining of a shareholders' meeting fell within subsection 157(b)(2)(O) and thus was a core matter, because reorganization plane might have been affected by the action taken at a shareholders' meeting. Therefore, the Court concluded, the proceeding was one "affecting . . . the assets of the estate."
This Court notes that virtually all matters involving Allegheny International at this point in time would somehow "affect . . . the assets of the estate" and, therefore, could be onsidered core proceedings. However, core proceedings were intended by the Supreme Court in Marathon, and by Congress in § 157, to be limited to matters directly relating to bankruptcy itself. The Bankruptcy Courts do not possess the power to adjudicate state-created rights which are not directly related to the bankruptcy.
The Court recognizes that the rights of the debtor's unsecured creditors will be affected by the outcome of this proceeding and, to that extent, the matter implicates interests governed by federal law. The fact that creditors' interests are involved, however, does not mean that adjudication of this matter will turn upon principles of federal law. To the contrary, the primary dispute between the parties herein concerns the adjudication of state-created rights, i.e., whether the shareholders of Allegheny International may be permitted to exercise their right to elect directors of their choosing. This is a matter which should be determined by an Article III court. Therefore, the matter properly is characterized as a non-core proeeding.
Section 157(c)(1) provides that, in non-core proceedings, only the district court has the authority to enter final orders. Therefore, to the extent that the order of the Bankruptcy Court enjoining the shareholders' meeting purports to operate as a final order, it has become null and void. The opinion issued by the Bankruptcy Court has been treated, for present purposes, as the findings of fact and conclusions of law required in non-core proceedings by § 157(c). The Court, however, declines to accept the Bankruptcy Court's conclusions for the following reasons.
The result this Court reaches herein would be no different had the matter been characterized as a core proceeding; even applying the "clearly erroneous" standard required in such cases, this Court would reject the Bankruptcy Court's determination.
Accepting for the purposes of argument the factual findings of the Bankruptcy Court, these facts fail to establish that a serious abuse of the rights and interests of the affected parties has occurred or is threatened.
The holding of a coporate election rarely will be enjoined, absent a demonstration of clear abuse. In Re J. P. Linahan, Inc., 111 F.2d 590 (2nd Cir. 1940). The "clear abuse" standard has been the rule in equity receiverships, in ordinary bankruptcy and in proceedings for reorganization for decades. Id. at 592. This standard has not been altered by the 1984 Bankruptcy Amendments. As the Second Circuit noted in In Re Johns-Manville Corporation, 801 F.2d 60, 64 (1986), "as a consequence of the shareholders' right to govern their corporation, a prerogative ordinarily uncompromised be reorganization, a bankruptcy court should not lightly employ its equitable power to block an election of a new board of directors." Such unusual relief should be granted only upon a showing of "clear abuse." (citing J. P. Linahan, Inc., supra.)
The clear abuse standard is consistent with the Pennsylvania common law standard concerning injunctive relief in the context of a shareholders' meeting; under Pennsylvania law, courts of equity have jurisdiction to restrain the holding of a corporate election only where there has been a showing that a fair and honest election cannot be held because of unlawful conduct, fraud, violence, or similar abuses. Deal v. Erie Coal Coke Company, 246 Pa. 552. 92 A. 701 (1914); Jenkins v. Baxter, 160 Pa. 199 (1984); A. P. Desanno Son. Inc. v. Desanno, 4 Chest. 432 (Pa.C.P. 1950).
At the hearing held May 18, 1988, the unsecured creditors conceded that they would be unable to make out the required showing of abuse.
In the case at hand, the Bankruptcy Court relied upon several findings in determining that the May 20, 1988 shareholders' meeting should be enjoined. The two primary concerns of the Bankruptcy Court appear to have been, first, that the "proxy battle is simply inconsistent with the 120-day period in which only the debtor may file a plan or reorganization" ( 11 U.S.C. § 1121(b)), and, second, that the proxy battle was being waged by a self-serving election committee. The Bankruptcy Court also was concerned that expenditures involved in the proxy battle were depleting the assets of the estate.
The Bankruptcy Court's opinion also makes reference to misleading proxy material. During the hearing held before this Court on May 18, 1988, counsel represented that no evidence on the issue of the accuracy of proxies was submitted to the Bankruptcy Court.
In addition, the Bankruptcy Court noted that (1) there was no apparent authority for the appointment, by the Equity Committee of the Election Subcommittee and (2) that the Election Committee and debtor-in-possession had hired consultants without leave of court. These factors would not justify the grant of the extraordinary relief requested by the Unsecured Creditors herein.
This Court is concerned that the proxy fight is resulting in the expenditure of large sums of money which the debtor-in-possession can ill afford. However, at the time the matter came before this Court for hearing, the shareholders' meeting was scheduled to commence in a matter of two to three days. Accordingly, it appeared evident that the bulk of the expenditures involved had already taken place and, therefore, this factor alone could not serve as the basis for a grant of injunctive relief.
With respect to the motives of the Election Committee, this Court notes that the Bankruptcy Court did not expressly find that the Election Committee was breaching its duty to represent the interests of all equity security holders; rather, the Bankruptcy Court's opinion simply makes reference to "suggestions" that the Election Committee was not proceeding entirely in good faith. The Bankruptcy Court's inferences concerning the motives of the Election Committee do not amount to a finding of clear abuse. In any event, the shareholders of Allegheny International are entitled to reach their own judgments concerning the motives of the Election Committee, and if these motives are found to be improper or inconsistent with the shareholders' interests, the Election Committee's slate can be rejected.
The Bankruptcy Court clearly was concerned that, if the Election Committee were successful in its proxy contest, persons would be elected to the Board of Directors who would change the direction of the reorganization, presumably preventing the filing, within the 120-day period, of a plan of reorganization. This harm foreseen by the Bankruptcy Court is of a somewhat speculative and contingent nature; there is no guarantee that the Election Committee would be successful in its proxy bid.
In addition, even assuming the Election Committee is successful and further assuming that this fact would support the Bankruptcy Court's conclusion that a reorganization plan would not be submitted within the 120-day period, no case of clear abuse has been made out. It may be true that the interests of the debtor's unsecured creditors would be better served by prompt submission of a reorganization plan. It likewise is true that, in bankruptcy, the interests of shareholders, to some extent, become subordinated to the interests of creditors. Nevertheless, the ability of shareholders to exercise their rights to corporate governance cannot be enjoined simply on the basis that a group of shareholders may be successful in their bid to elect directors whose views concerning a plan of reorganization may differ from those of existing management. The possibility of harm to the interests of the unsecured creditors posed by these contingent events is simply too remote to support the finding of irreparable harm necessary for injunctive relief.
In summary, it is not the proper role of this Court to interfere in corporate democracy absent a compelling showing of need. The facts of this case simply do not support a finding that a clear abuse has taken place. The injunctive relief granted by the Bankruptcy Court was inappropriate under the circumstances.
An appropriate Order will be issued.