Opinion
ORDER FOR APPOINTMENT OF CHAPTER 11 TRUSTEE
PETER W. BOWIE, Chief Bankruptcy Judge
Several months back, KBR Group filed motions to appoint Chapter 11 Trustees in this case, the companion Briarwood Capital, LLC case, and the Colony Properties cases. At the hearing, the Court ordered appointment of a Trustee for the Colony cases, and an Examiner in Briarwood, and continued the hearing to a date in the future for review of the Examiner's report. That date was subsequently set for July 12, 2010.
Immediately prior to the July 12 hearing, the Court and parties were notified by Lennar that Mr. Marsch had appeared as the person most knowledgeable at the § 341(a) hearing of an entity called Mountains Resort Properties, LLC, (MRP) which filed under Chapter 11 in Colorado. Certain interested parties, including Lennar and KBR argued for immediate appointment of a Trustee. Because Mr. Marsch and Briarwood had just been given notice of the additional arguments, the Court afforded Mr. Marsch and Briarwood an opportunity to respond to those arguments. They have done so.
Mr. Marsch contends in his opposition that the movants have their facts wrong about the merits of the transaction between Mr. Marsch and Mr. Minkow and Mr. Sachs in the transfer to them of the property in Colorado by transferring ownership of MRP. In so arguing, Mr. Marsch misses the point of great concern to the Court, his honesty with the Court as a debtor-in-possession in his own case, and as managing member of Briarwood Capital, LLC.
The Court's concerns arise in two major respects. The first arises from the Statement of Financial Affairs signed under penalty of perjury by Mr. Marsch on March 16, 2010. Item 10 required him to list all non-ordinary course transfers within two years before filing. He disclosed his transfer of a security interest in his interest in Colony Properties in exchange for a loan, which he has stated elsewhere was for monies to fund the litigation he is pursuing. He mentions no other transfer, although we are now told that he sold MRP to Minkow and Sachs for $950,000 plus $500,000 in services for the same reason, to raise cash to fund litigation. His failure to disclose the transfer of MRP is puzzling because it is not as if he forgot about it altogether. To the contrary, in the same statement, at item 18, asking him to identify the nature, location and name of all businesses in which he was "an officer, director, partner, or managing executive..."in the preceding 6 years, he listed MRP, gave its address as his own, and the nature of the business was "investment/management", and the dates were "12/11/06 - present". Despite identifying the nature of MRP as an investment, there is no mention of an interest in MRP on Schedule B.
At the July 12 hearing, and since, Mr. Marsch's position has been that he intended to disclose his relationship to MRP and had actually submitted to his lawyers amendments to his Schedules and Statement of Financial Affairs in late April (after MRP filed bankruptcy). Those languished on an attorney's desk while the attorney was out of the office for surgery, and were finally filed July 16, 2010. In the amendment to the Statement of Financial Affairs item 10, Mr. Marsch now says on May 9, 2009 he sold his membership interest in MRP to an entity and to Mr. Sachs for $950,000 cash and $500,000 for forgiveness of debt. Item 18 was amended to add the sale of the interest in May 2009 while indicating he is still involved with MRP at present, in some undisclosed capacity.
Section 1104, title 11, United States Code, provides in relevant part:
(a) At any time after the commencement of the case but before confirmation of a plan, on request of a party in interest or the United States trustee, and after notice and a hearing, the court shall order the appointment of a trustee -
(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...;
(2) if such appointment is in the interests of creditors, any equity security holders, and other interests of the estate...; or
(3) if grounds exist to convert or dismiss the case under section 1112, but the court determines that the appointment of a trustee or examiner is in the best interests of creditors and the estate.
While some courts have fixed on the word "shall" to indicate that appointment of a trustee is mandatory if "cause" under (a)(1) is found, (see In re Sundale , 400 B.R. 890 (Bankr. S.D. Fla. 2009)), the court in In re G-I Holdings, Inc. explained:
While appointment of a trustee is mandatory upon a finding of cause under subsection (1) or upon a finding that a trustee would serve the interests outlined in subsection (2), the decision to appoint a trustee still falls within the court's discretion. A determination of "cause" under subsection (1) is within the court's discretion.
295 B.R. at 507, aff'd 385 F.3d 313, 317 (3d Cir. 2004).
Factors to consider for cause under (a)(1) include:
1) Materiality of the misconduct; 2) Evenhandedness or lack of same in dealings with insiders or affiliated entities vis-a-vis other creditors or customers; 3) The existence of pre-petition voidable preferences or fraudulent transfers; 4) Unwillingness or inability of management to pursue estate causes of action; 5) Conflicts of interest on the part of management interfering with its ability to fulfill fiduciary duties to the debtor; 6) Self-dealing by management or waste or squandering of corporate assets.
In re Intercat, Inc. , 247 B.r. 911, 921 (Bankr. S.D. Ga. 2000).
Subsection (a)(2) also has a list of factors for a court to consider. They include:
(1) the trustworthiness of the debtor;
(2) the debtor in possession's past and present performance and prospects for the debtor's rehabilitation; (3) the confidence - or lack thereof - of the business community and of creditors in present management; and (4) the benefits derived by the appointment of a trustee, balanced against the cost of the appointment.
In re Sundale , 400 B.R. at 901.
As this Court expressed at the May hearing, there is a general presumption that a debtor-in-possession should be able to remain in possession absent a showing to the contrary. In In re Marvel Entertainment Group, Inc. , 140 F.3d 463, 471 (3d Cir. 1998), the court explained:
"It is settled that appointment of a trustee should be the exception, rather than the rule." [citation omitted.] In the usual chapter 11 proceeding, the debtor remains in possession throughout reorganization because" current management is generally best suited to orchestrate the process of rehabilitation for the benefit of creditors and other interests of the estate." Thus, the basis for the strong presumption against appointing an outside trustee is that there is often no need for one: "The debtor-in-possession is a fiduciary of the creditors and as a result, has an obligation to refrain from acting in a manner which could damage the estate, or hinder a successful reorganization." [Citation omitted.] The strong presumption also finds its basis in the debtor-in-possession's usual familiarity with the business it had already been managing at the time of the bankruptcy filing, often making it the best party to conduct operations during the reorganization.
These cases are very different from the usual operating business chapter 11 cases. Here, the principal assets, and liabilities of the debtors are litigation claims by and against the debtors. While pursuit and defense of those claims require factual knowledge, they do not, in themselves, require the typical business management skills that underlie the presumption.
In these cases, the Court is now persuaded that any presumption has been fully rebutted and that movants have shown by clear and convincing evidence that a trustee should be appointed in both the Marsch and Briarwood cases. In so concluding, the Court has looked specifically at Mr. Marsch's testimony, under oath at the § 341(a) meetings of both Briarwood and MRP.
The Briarwood § 341(a) meeting was held on March 23, 2010. During the sworn testimony of Mr. Marsch, as the managing member of Briarwood, he was asked:
BY MR. MARROSO:
Q. Page 3, there are various payments listed in the amount of $2,000 to an entity called Mountain Resort Properties, LCC?
MR DAVIS:...
BY MR. MARROSO:
Q. Various payments totalling $2,000 to Mountain Resource Properties, LLC. Are you - you've listed Mountain Resource Properties as an affiliate. What is the affiliation between the debtor, Briarwood, and Mountain Resource Properties, LLC?
A. I'm not sure, actually.
Q. Does Briarwood have an ownership interest?
A. No, it doesn't.
Q. Does Briarwood have an ownership in another entity that has an ownership interest in Mountain Resort Properties?
A. Not that I know of, no.
Q. Who are the members of Mountain Resource Properties?
A. I don't have any idea at this point.
Q. Have you - is it a company with which Briarwood has been affiliated in the past?
A. No.
Q. And what is the nature of Mountain Resort Properties' business?
A. I'm not actually sure right now.
Q. Do you know who are the members?
A. I don't.
Q. Can you tell me anything at all about various payments totalling $2,000 to Mountain Resort Properties?
A. I can't.
Shortly after giving that testimony, MRP filed bankruptcy in Colorado and Mr. Marsch appeared as the representative of MRP at the 341(a) meeting on May 16, 2010 in that case. He testified he was appearing by agreement with the LLC shareholders, that he had "knowledge of the day-to-day operations of the debtor", "knowledge of the history of the debtor", and that he was a member of the debtor until May 2009. He testified the principal asset was a residence in Avon, Colorado, appraised in April 2009 at about $10 million, while the debt is about $6 million ($5.9 million). He testified he thinks the property is still worth $10-11 million, and explained why. Interestingly, Mr. Marsch testified that all the personal property in the Avon house belonged to his wife, even though he had sold his interest in MRP a year earlier. He testified he sold for $950,000, but did not mention any additional compensation in the form of debt forgiveness or services. Moreover, he testified that if Sachs and Minkow sold the property for a good return, he anticipated they would give him some part of the equity because that is how they do business together.
In Briarwood's response papers, Mr. Marsch focused on his economic analysis of the sale of his MRP interest, as his attorney did at the July 12 hearing. In addition, Mr. Marsch explained he appeared for MRP because he was a guarantor on the loan on the Avon property. Then, in what this Court considers an unmitigated effort to deflect the impact of Mr. Marsch's apparent dishonesty at the Briarwood 341(a), he argues his answers were correct that Briarwood had no interest in MRP. It was Mr. Marsch who had the interests. Yet he testified he did not know what sort of business MRP did or who its members were. Contrary to his assertions, Mr. Marsch did not "give brief, truthful answers at the 341 meeting rather than providing additional information that was beyond the scope of the questions asked."
Whether or not there was or is sufficient equity in the Avon property to support a fraudulent transfer claim, the issue squarely presented to the Court is Mr. Marsch's dishonest testimony, under oath, at the Briarwood 341(a) meeting. This Court has lost confidence in Mr. Marsch's capacity for candor and honesty, and concludes that a trustee should be appointed in both the Marsch and Briarwood Chapter 11 cases, both for cause under § 1104(a)(1), and in the best interests of creditors and the estate under § 1104(a)(2).
The United States Trustee is directed to comply with the applicable statutory provisions and identify and select a trustee in each of the Marsch and Briarwood cases.
IT IS SO ORDERED: