659 B.R. 426
Bankr. S.D.N.Y.2024Background:
- Eletson Holdings and affiliates operate an international gas-shipping enterprise; three family groups (the "Families") control the debtors and related non-debtor subsidiaries (notably Eletson Gas and Eletson Corp.).
- In 2022–2023 a dispute with Levona/Murchinson over Eletson Gas preferred shares led to JAMS arbitration; the arbitrator issued a Final Award finding the preferred shares transferred to Cypriot nominees and awarding substantial damages to Eletson Gas and the nominees.
- Certain noteholders filed involuntary Chapter 7 petitions (March 2023); the cases were later converted to voluntary Chapter 11. Stay relief was granted to permit the arbitration to proceed but any award was stayed pending further order.
- Creditors (the Committee, the U.S. Trustee, and petitioning creditors) moved to appoint a Chapter 11 trustee, alleging transfer of assets out of the estate, insider favoritism, disclosure failures, depletion of estate resources, and management conflicts.
- Debtors formed a Demand Review Committee, filed Chapter 11 plans (including a new-value plan), sought DIP financing, and produced testimony defending management and estate administration.
- After evidentiary hearings and briefing, the Bankruptcy Court denied the in limine/exclusion motions and denied all Trustee Motions, finding movants failed to prove cause by clear and convincing evidence and that appointment was not in creditors’ best interests.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Admissibility of declarant evidence (PC motion in limine) | Debtor declarations lack personal-knowledge foundation and contain legal/opinion matter; exclude or limit them | Bench trial context permits broader admission; weight, not exclusion, is appropriate | Denied — in a bench trial doubtful evidence is better admitted and weighed by the court |
| Exclusion of creditor experts (Debtors’ motion to exclude Drake/Romano) | Experts were not disclosed per FRCP 26 and no reports provided; testimony should be excluded | Bankruptcy Rule 9014 relaxes FRCP 26 obligations in contested matters; testimony was disclosed by declaration and depositions were available | Denied — experts admissible; parties could have deposed; court can assess qualifications and weight |
| Appointment of Chapter 11 trustee for cause (11 U.S.C. §1104(a)(1)) based on prepetition transfer and estate depletion | Transfer of Eletson Gas preferred shares to nominees (family transaction) and pursuit of Arbitration diverted >$100M from estate; management is conflicted and dishonest; failure to pursue avoidance actions and disclosure failures | BOL expressly granted option to Eletson Gas or its nominee; transfers occurred prepetition; arbitrator found no bad faith in late disclosure; Demand Review Committee exists; creditors could seek derivative standing | Denied — movants failed to prove cause by clear and convincing evidence; factual differences and prior consensual terms distinguished precedents cited by movants |
| Appointment of Chapter 11 trustee in creditors’ best interest (11 U.S.C. §1104(a)(2)) | Debtors untrustworthy; acrimony and creditor loss of confidence; trustee would stop alleged insider self-dealing and benefit creditors | Trustee would be costly, risk defaults under international charters, harm enterprise value, and delay progress; new-value plan and competing-plan process available | Denied — court weighed trustworthiness, performance, creditor confidence, and cost/benefit and concluded appointment not justified; factor analysis was neutral or favored debtors |
Key Cases Cited
- In re Bayou Grp., LLC, 564 F.3d 541 (2d Cir. 2009) (appointment of trustee is extraordinary and requires clear and convincing evidence)
- In re Adelphia Commc'ns Corp., 336 B.R. 610 (Bankr. S.D.N.Y.) (discussing standards for trustee appointment)
- In re V. Savino Oil & Heating Co., Inc., 99 B.R. 518 (Bankr. E.D.N.Y. 1989) (prepetition transfers and nondisclosure can constitute cause for trustee)
- In re Sillerman, 605 B.R. 631 (Bankr. S.D.N.Y. 2019) (appointment considerations where debtor refused to pursue avoidance actions and made transfers)
- 203 N. LaSalle St. P'ship v. Bank of Am., 526 U.S. 434 (1999) (new-value plan and competing plan process as a route for confirmation)
- Van Alen v. Dominick & Dominick, Inc., 560 F.2d 547 (2d Cir. 1977) (in bench trials courts should admit doubtfully admissible records and let the finder assess weight)
- Smart World Techs., LLC v. Juno Online Servs., 423 F.3d 166 (2d Cir. 2005) (debtors-in-possession owe fiduciary duties and must perform trustee obligations)