605 B.R. 631
Bankr. S.D.N.Y.2019Background
- Debtor Robert F.X. Sillerman filed was converted to Chapter 11 after an involuntary Chapter 7 petition; his schedules list interests in ~47 entities and major real estate and business holdings.
- The Committee of Unsecured Creditors moved to appoint a Chapter 11 trustee (alternatively convert to Chapter 7) citing failures by Sillerman to administer the estate transparently and lawfully.
- The Debtor repeatedly pursued speculative financing and shifting plan strategies (initial "Three Initiatives," later an Anguilla real‑estate development), but the financing never materialized; the Debtor filed a Modified (liquidating) plan tied to the Anguilla project.
- The Committee adduced evidence of unauthorized post‑petition payments to professionals, undisclosed transfers to affiliates and to the Debtor’s wife, failure to file required Rule 2015.3 affiliate reports, failure to file post‑petition tax returns, and failure/refusal to investigate avoidance claims.
- The Debtor opposed the motion, but did not contest the documentary declarations at hearing; the Court found the record (docket, declarations, admissions) sufficient and declined an evidentiary hearing.
Issues
| Issue | Plaintiff's Argument (Committee) | Defendant's Argument (Sillerman) | Held |
|---|---|---|---|
| Whether "cause" exists under 11 U.S.C. §1104(a)(1) to appoint a Chapter 11 trustee | Debtor committed fraud/dishonesty/incompetence/gross mismanagement by unauthorized payments, non‑compliance with orders and rules, failure to file taxes/2015.3 reports, transfers to affiliates/wife, and refusal to pursue avoidance actions | Debtor contends some payments were ordinary‑course or in‑house employee payments, and that disclosures in MORs suffice; disputes do not warrant trustee | Court held clear and convincing evidence of cause under §1104(a)(1) and ordered appointment of a Chapter 11 trustee |
| Whether appointment under 11 U.S.C. §1104(a)(2) is in the estate's best interests | A trustee will provide impartial oversight, preserve assets, investigate conflicts and avoidance claims, and restore creditor confidence | Debtor argued continued possession and plan process should proceed; sought to justify conduct and proposed modified plan | Court found appointment under §1104(a)(2) also warranted — benefits of independent fiduciary outweigh costs |
| Whether case should be converted to Chapter 7 under 11 U.S.C. §1112(b) | Cause for conversion exists (continuing diminution of estate, lack of likelihood of rehabilitation, noncompliance with orders and filings, unfiled tax returns) | Debtor preferred to proceed in Chapter 11 and prosecute his plan(s) | Court found cause to convert but exercised discretion to appoint a trustee instead, concluding trustee appointment better serves creditors and estate |
| Legality of unauthorized post‑petition retention/payments to professionals | Such retention/payments violate §327 and local rules and show noncompliance warranting removal of control | Debtor claimed payments were to in‑house personnel or ordinary‑course; later filed retention application nunc pro tunc for some | Court found unauthorized payments and failure to seek prior approval violative of retention rules and supportive of cause |
| Failure to file Rule 2015.3 reports and tax returns | Non‑filing obscures affiliate holdings/transfers and is a statutory duty; failures support appointment/conversion | Debtor claimed MORs provided sufficient affiliate info or misunderstood U.S. Trustee guidance; sought last‑minute retention of tax accountant | Court rejected excuses; absence of 2015.3 reports and unfiled tax returns constituted cause |
| Conflict of interest / refusal to pursue avoidance actions | Debtor admitted he would not sue insiders (e.g., wife, foundation) and made repeated transfers to affiliated entities, undermining fiduciary duty | Debtor argued conflicts and transfers were legitimate or immaterial and proposed Anguilla plan that preserves some interest | Court found a clear conflict and refusal to pursue estate claims a breach of fiduciary duty supporting trustee appointment |
Key Cases Cited
- In re Ionosphere Clubs, 113 B.R. 164 (Bankr. S.D.N.Y. 1990) (presumption debtor remains in possession is not absolute; trustee appointment when fiduciary duties unmet)
- In re V. Savino Oil & Heating Co., 99 B.R. 518 (Bankr. E.D.N.Y. 1989) (noncompliance with Bankruptcy Code/orders can constitute cause for trustee)
- In re The 1031 Tax Grp., LLC, 374 B.R. 78 (Bankr. S.D.N.Y. 2007) (courts have wide discretion under §1104; flexible standards for appointment)
- In re Taub, 427 B.R. 208 (Bankr. E.D.N.Y. 2010) (factors for §1104(a)(2) include trustworthiness, performance, creditor confidence, and cost/benefit)
- In re Marvel Entm’t Group, 140 F.3d 463 (3d Cir. 1998) (interpreting §1104(a)(2) and discretionary considerations)
- In re Grasso, 490 B.R. 500 (Bankr. E.D. Pa. 2013) (failure to make required filings/support for appointment of trustee)
- In re Picacho Hills Utility Co., 518 B.R. 75 (Bankr. D.N.M. 2014) (failure to investigate/pursue avoidance actions supports appointment)
- In re BH S & B Holdings, LLC, 439 B.R. 342 (Bankr. S.D.N.Y. 2010) (conversion under §1112(b) requires both diminution of estate and lack of reasonable likelihood of rehabilitation)