Opinion
Case No. 3:16-bk-2230-PMG
06-29-2018
In re: RMS Titanic, Inc., et al., Debtors.
(Jointly Administered) Chapter 11
ORDER ON MOTION OF EUCLID CLAIMS RECOVERY LLC FOR APPOINTMENT OF CHAPTER 11 TRUSTEE
THIS CASE came before the Court for a preliminary hearing on the Motion of Euclid Claims Recovery LLC for Appointment of Chapter 11 Trustee (the Trustee Motion). (Doc. 1013).
Written responses to the Trustee Motion were filed by the United States of America, Department of Commerce, National Oceanic and Atmospheric Administration (Doc. 1041), the Official Committee of Equity Security Holders (Doc. 1046), the Official Committee of Unsecured Creditors (Doc. 1048), and the Debtor (Doc. 1049).
The Court has considered the papers and record from the hearing, and determines that the Trustee Motion should be denied, without prejudice.
A. Section 1104(a)
The Trustee Motion is brought under §1104(a) of the Bankruptcy Code. (Doc. 1013, ¶ 1). Section 1104(a) provides:
11 USC § 1104. Appointment of trustee or examiner
(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—
11 U.S.C. §1104(a)(Emphasis supplied). The appointment of a trustee under §1104(a) is an extraordinary remedy that should be used only when the circumstances show that the appointment is warranted. In re Bergeron, 2013 WL 5874571, at 6 (Bankr. E.D.N.C.).(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, but not including the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor; or
(2) if such appointment is in the interests of creditors, any equity security holders, and other interests of the estate, without regard to the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor.
"There is a strong presumption in chapter 11 cases that a debtor in possession should remain in possession absent a showing of the need for a trustee. . . . This presumption is based on the belief that the debtor in possession is most knowledgeable about, and best able to run, the debtor's business." In re Climate Control Mechanical Services, Inc., 2018 WL 1214475, at 6 (Bankr. M.D. Fla)(quoting In re Sundale, Ltd., 400 B.R. 890, 899 (Bankr. S.D. Fla. 2009)).
B. The Trustee Motion
In this case, Euclid Claims Recovery LLC (Euclid) asserts that a Chapter 11 trustee should be appointed for two primary reasons.
First, Euclid contends that the Debtor has failed to advance a successful sale of the Debtor's assets in the two years since the Chapter 11 petition was filed. (Doc. 1013, pp. 5-7).
According to Euclid, the Debtor's "ill-conceived and failed sales efforts" are documented by the record in the Chapter 11 case:
1. On June 20, 2016, the Debtor filed a Motion for Order Authorizing the Debtors to Market and Sell Certain Titanic Artifacts Free and Clear of Liens, Claims, and Interests. (Doc. 28). In this Motion, the Debtor referred to a 2014 report which valued the Debtor's total artifact collection at approximately $218 million. The Debtor requested permission to sell only "a very specific, limited number of artifacts from the French Collection," however, and stated that the limited sale would generate enough revenue to pay all creditors in full. (Doc. 28, ¶¶ 21, 22, 24).The sales proposed by the Debtor in the three Motions were never completed, and no Chapter 11 Plan was pending at the time that Euclid filed the Trustee Motion.
2. On May 18, 2017, the Debtor filed a Motion for Order Authorizing the Debtor to enter into a Plan Support Agreement with the Committee of Unsecured Creditors and the Committee of Equity Security Holders. (Doc. 587). In the Motion, the Debtors outlined a "transaction for the sale of substantially all of the interests in and/or assets of the Debtors" pursuant to the procedures and deadlines established under the Plan Support Agreement. (Doc. 587, ¶ 8).
3. On November 14, 2017, the Debtor filed a Motion for Order (I) Approving Procedures in Connection with the Sale of All or Substantially All of the Debtors' Assets, and (II) Scheduling a Related Auction. (Doc. 811).
As a second basis for the Trustee Motion, Euclid contends that the Debtor has incurred professional fees and other administrative expenses during its Chapter 11 case that are excessive and detrimental to the Debtor's prepetition creditors. (Doc. 1013, pp. 9-11).
Specifically, Euclid asserts that the Debtor's unsecured debt was approximately $12 million as of the petition date, and that the Debtor's secured debt was approximately $3 million as of the petition date, for total prepetition debt of approximately $15 million.
According to Euclid, however, the approximate sum of $5 million had been allowed or incurred as professional fees in the Chapter 11 case as of the filing of the Trustee Motion. Additionally, the Debtor had obtained secured, super-priority financing during the Chapter 11 case in the approximate amount of $4.2 million as of the filing of the Trustee Motion. (Doc. 650).
Based on the professional fees and post-petition debt of more than $10 million, Euclid asserts that the administrative costs incurred by the Debtor during the Chapter 11 case are excessive and disproportionate to the Debtor's prepetition debt of approximately $15 million.
C. Events after the filing of the Trustee Motion
The Trustee Motion was filed on May 1, 2018. After the filing, at least two significant developments have occurred in the Chapter 11 case.
First, on June 1, 2018, the Official Committee of Equity Security Holders filed a Chapter 11 Plan and accompanying Disclosure Statement. (Docs. 1044, 1045). Generally, the Equity Committee's Plan is a liquidating Plan:
The Plan provides for the liquidation of all of the Estate's assets either as going concerns or as individual asset sales. The Plan provides for the marketing and sale of the French Artifacts by auction, run by Guernsey's. The Liquidating Trustee also will market and sell the American Artifacts and rights attendant thereto to a Qualified Institution, as defined in the Covenants. Finally, the Plan provides for the Liquidating Trustee to market and sell, or abandon, all remaining Liquidating Trust Assets.(Doc. 1044, pp. 15-16). In addition to proposing the liquidating Plan, the Equity Committee also obtained permission to prosecute or settle certain claims on behalf of the Chapter 11 estate (Doc. 1036), and filed a Complaint against certain individuals or entities for breach of fiduciary duty and negligence. (Adv. Pro. 3:18-ap-64-PMG).
Second, after Euclid filed the Trustee Motion, the Debtor signed a document entitled Stalking Horse Purchaser Term Sheet for Sale of Substantially All Assets of Premier Exhibitions, Inc. and its Debtor and Non-Debtor Affiliates. (Exhibit A to Doc. 1049). According to the Debtor, the Term Sheet reflects a proposed sale of substantially all of the estate assets "as a going concern to an acquisition vehicle formed by Apollo, Alta, PacBridge Capital Partners (HK) Ltd., and the Debtors' secured lenders."
The material terms of the Term Sheet are as follows: $17.5 million purchase price; due diligence completed by June 5, 2018; proposed break-up fee of the greater of $500,000 or 3% of the purchase price, plus expense reimbursement (collectively subject to a cap of $1 million); the buyer's payment of all cure costs associated with the assumption and assignment of purchased contracts and real property leases; and proposed bidding procedures that contemplate a public auction for higher and better offers.(Doc. 1049, ¶¶ 26-27). At the hearing on the Trustee Motion, the Debtor represented that it expects to file a motion to approve an Asset Purchase Agreement by June 22, 2018, and that it will request a July 16, 2018, hearing to establish the bidding procedures for the proposed sale.
D. Conclusion
The Debtor's assets include approximately 5,500 artifacts from the Titanic salvage site. The assets are unique, and the sale or management of the assets are subject to a number of complexities, including issues involving (1) administration by the United States District Court for the Eastern District of Virginia, (2) the application of certain Covenants and Conditions for the Future Disposition of Objects Recovered from the RMS Titanic, and (3) the sensibilities of the market regarding the transfer of historical artifacts.
In the two years since the case was filed, the Debtor has proposed three separate methods to sell some or all of the Titanic artifacts, but has not completed a sale. Euclid asserts that the failed sales evidence a "lack of fiduciary stewardship in advancing this case," and seeks the appointment of a Chapter 11 trustee. (Doc. 1013, ¶ 3).
After Euclid filed the Trustee Motion, the Equity Committee filed a liquidating Chapter 11 Plan and Disclosure Statement, and the Debtor filed a signed Term Sheet describing a stalking horse bid and bidding process. See In re Shotwell Landfill, Inc., 2014 WL 4377721, at 4 (Bankr. E.D.N.C.)(A motion to appoint a Chapter 11 trustee was denied, where the issues raised in the motion were appropriate for resolution in the confirmation process, which was underway.); In re Sundale, Ltd., 400 B.R. at 909("[W]hile there have been missteps, the case is moving forward, the Debtors have filed the Joint Plan and their ability to reorganize will be tested through the confirmation process.").
The Court has considered the unique nature of the Debtor's assets, and the efforts currently in progress to liquidate the assets for the benefit of the estate. Based on these considerations, the Court finds that the Trustee Motion should be denied at this time, and the sale proponents should be permitted to develop their liquidation plans in accordance with the procedures of Chapter 11.
Accordingly:
IT IS ORDERED that the Motion of Euclid Claims Recovery LLC for Appointment of Chapter 11 Trustee is denied, without prejudice.
DATED this 29 day of June, 2018.
BY THE COURT
Paul M. Glenn
PAUL M. GLENN
United States Bankruptcy Judge