Opinion
Case No. 02-83984-SSM
November 27, 2002.
John Wm. Butler, Jr., Esq., Skadden, Arps, Slate, Meagher Flom, counsel for the debtors in possession.
Malcolm Mitchell, Esq., Vorys, Sater, Seymour Pease, L.L.P., local counsel for the Official Committee of Unsecured Creditors.
Lawrence E. Rifken, Esq., McGuireWoods, LLP, local counsel for the debtors in possession.
Dennis Early, Esq., Assistant United States Trustee
Scott L. Hazan, Esq., Otterbourg, Steindler, Houston Rosen, P.C., counsel for the Official Committee of Unsecured Creditors.
MEMORANDUM OPINION
The court — apparently as the result of an organized campaign — has received approximately a hundred largely identical letters from employee-shareholders of the debtor airline. The common theme of these letters is a request that the court not allow the debtor's common stock to be cancelled as part of any reorganization that might be approved. A few of the writers have amplified on the otherwise uniform language by detailing the personal financial hardship they would suffer if the company's existing stock were cancelled.
The court can readily appreciate the anxiety felt by those who have written. In deciding controversies, however, bankruptcy judges, like other judges, are prohibited from considering ex parte communications from litigants or their attorneys. F.R.Bankr.P. 9003; Canon 3(A)(4), Code of Conduct for United States Judges. The reason is obvious. Public confidence in the integrity of judicial proceedings would be severely undermined if judges were to decide cases based on arguments and information communicated in secret. The requirement that communications intended to influence a court's decision be served on the other parties to the case, and those parties be given an opportunity to respond, is basic to the fairness of judicial proceedings.
Canon 3(A)(4) states in relevant part as follows: "A judge should accord to every person who is legally interested in a proceeding, or the person's lawyer, full right to be heard according to law, and, except as authorized by law, neither initiate nor consider ex parte communications on the merits, or procedures affecting the merits, of a pending or impending proceeding."
This is not to say that it is particularly unusual for judges to receive letters from parties — especially those not represented by counsel — raising issues with respect to pending cases. Often letters are sent directly to the judge because the person does not know the correct legal procedure for bringing the matter to the court's attention. In some instances, it may be appropriate — depending on the nature of the issue — for the court to supply copies of the letter to the other parties, give them an opportunity to respond, and to set the matter for a hearing.
With respect to the present letters, however, it would be premature to set a hearing. Any cancellation of existing shareholder interests can occur only as a result of a confirmed plan, and the debtor has not yet filed a plan. The debtor, to be sure, has announced that it intends to file a plan shortly, and the court would certainly not be surprised if the plan envisioned the cancellation of existing stock. The cancellation of existing equity interests in a chapter 11 reorganization, while not universal, is by no means uncommon. The reason lies in what is referred to as the " absolute priority rule." The rule, which grew out of early railroad reorganization cases, is codified today at § 1129(b)(2)(B), Bankruptcy Code. Stripped to its essentials, the rule states that if a senior class of claims or interests will be paid less than the full amount of its claims, a junior class cannot retain or receive any interest in the reorganized debtors unless the senior class consents. Since shareholders are junior to unsecured creditors, this means that shareholders cannot retain their interest in the reorganized debtor unless the unsecured creditors either consent or are paid in full. Of course, sometimes the unsecured creditors will consent to a plan that provides a full or partial carve-out for existing equity interests notwithstanding that the unsecured claims are being compromised. But that is generally an issue for negotiation among the various creditor and shareholder constituencies.
The court is of course aware that the absolute priority rule was formulated in an age well before the phenomenon of employee retirement savings plans funded with company stock. The letters to the court state that cancellation of the company's stock would wipe out a substantial portion of many employees' retirement savings. If that were to occur, the resulting baleful effect on employee morale is something that should be of concern not only to the company's management but also to creditors whose likelihood of repayment depends strongly on the debtor's post-confirmation economic success. That success, in turn, will certainly hinge upon the efforts of a dedicated workforce.
In any event, there will be no cancellation of shareholder interests unless and until a plan is proposed and confirmed that provides for such cancellation. Shareholders will be given ample notice of the hearing on confirmation of any plan that would impair their interests and will have an opportunity to file formal objections and to appear and be heard. Whether a given plan should be confirmed requires the court to consider a host of factors. For the court to express a view at this point, before a plan has been filed, or its proponents heard from, with respect to the treatment of particular claims or interests would plainly be improper. However, the court will certainly, in connection with any hearing on confirmation, consider objections properly raised in papers filed with the clerk and served on opposing parties and the United States Trustee.
The court will direct the clerk to mail a copy of this opinion to counsel for the debtors, counsel for the Official Committee of Unsecured Creditors, the United States Trustee, and each of the persons who have written to the court.
A few of the writers did not supply return addresses and are therefore not listed.