544 B.R. 297
Bankr. M.D. Penn.2016Background
- Debtor Morningstar Marketplace, Ltd., a PA limited partnership, filed Chapter 11 on Feb 3, 2014; its only significant asset is commercial real estate used by related entities MMI (flea market) and Morningstar Solar. General partner Andrew W. Lentz controls Debtor and the related operating entities.
- Secured creditors: PNC (first mortgage) and Manufacturers & Traders Trust Co. (M&T) (trustee on $3.4M bond loan secured by second mortgage). Debtor’s income depends on MMI rent; MMI frequently paid vendors in cash and failed to remit all rents.
- Debtor sought to market and sell the business-as-a-going-concern with related entities; two brokers were retained; listing price was reduced from $5.2M to $4.2M and later a letter of intent proposed $2.8M (assignment of PNC mortgage, $200K cash) that would leave M&T unpaid.
- Multiple stipulated cash-collateral orders authorized use of cash collateral conditioned on budgets, timely tax and mortgage payments, property manager retention, and other protections; orders were repeatedly modified and Debtor breached them (missed payments, unauthorized professional and Lentz disbursements, unpaid taxes).
- M&T moved for appointment of a Chapter 11 trustee (and other relief) alleging gross mismanagement, conflicts of interest (Debtor management/professionals representing both Debtor and tenant MMI), unauthorized use of cash collateral, and inability to effect a sale after nearly two years.
Issues
| Issue | Plaintiff's Argument (M&T) | Defendant's Argument (Debtor) | Held |
|---|---|---|---|
| Whether "cause" exists under 11 U.S.C. § 1104(a)(1) to appoint a Chapter 11 trustee for fraud/dishonesty/incompetence/gross mismanagement | Debtor engaged in gross mismanagement: failed to pay taxes and M&T, made unauthorized payments to principal and professionals, conflicts of interest with related entities, and misused cash collateral | Debtor lacked intent to rehabilitate but sought to sell as going concern; creditors had accepted the operating arrangement and no deliberate fraud shown | Court: M&T failed to prove cause under §1104(a)(1) by clear and convincing evidence; gross mismanagement not established to the required standard |
| Whether appointment of a trustee is warranted in the interests of creditors under § 1104(a)(2) | A trustee is needed because reorganization is impossible, management is conflicted and lacks creditor confidence, and appointment’s benefits outweigh costs (M&T offered to bear trustee cost) | Debtor argued continued marketing/sale efforts and that creditors previously acquiesced to the structure; conflicts were known and not decisive | Court: Appointment under §1104(a)(2) is appropriate — lack of confidence, inability to reorganize, and likely benefit of trustee justify appointment |
| Whether conversion/dismissal grounds under §1112(b)(4) support appointing trustee instead of conversion/dismissal | Multiple §1112(b)(4) grounds exist (substantial diminution, unauthorized use of cash collateral, failure to comply with orders, unpaid taxes) supporting conversion/dismissal or trustee appointment | Debtor stressed marketing efforts and practical difficulties (e.g., flea-market fire) undermining prospects but not rehabilitative potential | Court: Those §1112(b)(4) factors exist and, given trustee appointment is an alternative to conversion/dismissal, they further support appointing a trustee |
| Legitimacy of Debtor’s sale motion without creditors’ consent and prior bidding procedures | Sale to proposed purchaser inadequately protected creditor interests and attempted to bypass approved procedures, leaving M&T unpaid | Debtor attempted expedited sale to monetize asset; argued sale was necessary and brokered | Court: Sale attempt (and proceeding without agreed bidding procedures) was problematic; contributed to finding trustee appointment appropriate |
Key Cases Cited
- In re V. Savino Oil & Heating Co., 99 B.R. 518 (Bankr. E.D.N.Y. 1989) (presumption favoring debtor in possession; trustee appointment is exception requiring careful exercise of discretion)
- Marvel Entm’t Grp., Inc. v. Official Comm. of Unsecured Creditors, 140 F.3d 463 (3d Cir. 1998) (movant must prove need for trustee by clear and convincing evidence; fiduciary duties of debtor-in-possession)
- Sharon Steel Corp. v. Nat’l Fuel Gas Distrib. Corp., 871 F.2d 1217 (3d Cir. 1989) (appointment of trustee should be the exception; standard for appointing trustee)
- In re Ionosphere Clubs, Inc., 113 B.R. 164 (Bankr. S.D.N.Y. 1990) (factors for appointment in interests of creditors, including trustworthiness, performance, creditor confidence, and cost-benefit analysis)