In Re E.S. Bankest, L.C.
MEMORANDUM OPINION GRANTING THE MOTIONS BY LEWIS B. FREEMAN, CUSTODIAN EXCUSED FROM TURNOVER, AND BANCO ESPIRITO SANTO INTERNATIONAL, LTD., TO STRIKE THE MOTION BY GUNSTER, YOAKLEY & STEWART, P.A. FOR ORDER (I) CONVERTING CHAPTER 11 CASE TO CASE UNDER CHAPTER 7 OF THE BANKRUPTCY CODE, OR (II) APPOINTING CHAPTER 11 TRUSTEE, OR (III) APPOINTING AN EXAMINER, PURSUANT TO 11 U.S.C. §§ 105, 1104 AND 1112(b) AND BANKRUPTCY RULE 9014
THE MATTER сame before the Court for hearing on January 13, 2005 at 11:00 a.m. in Miami, Florida upon the motions by Lewis B. Freeman, custodian excused from turnover with the rights, powers, duties and obligations of a debtor in possession (“Freeman”) (C.P. No. 74), and Banco Espirito Santo International, Ltd. (“BESIL”) (C.P. No. 71) (Freeman and BESIL shall be collectively referred to herein as the “Movants”) to strike (collectively, the “Motions to Strike”) the Motion by Gunster, Yoakley & Stewart, P.A. for Order (I) Converting Chapter 11 Case to Case Under Chapter 7 of the Bankruptcy Code; or (II) Appointing Chapter 11 Trustee; or (III) Aрpointing an Examiner, Pursuant to 11 U.S.C. §§ 105, 1101 and 1112(b) and Bankruptcy Rule 9011 (the “Motion to Convert”) (C.P. No. 32) filed by Gunster, Yoakley & Stewart, P.A. (“Gun-ster”). Based upon the pleadings and arguments and for the reasons set forth herein, the Court grants the Motions to Strike, in part, finding that Gunster lacks party-in-interest standing to prosecute the Motion to Convert. The following constitutes the Court’s findings of fact and conclusions of law as required by Fed. R.Bankr.P. 7052.
Findings of Fact
1. On August 9, 2004, E.S. Bankest, L.C. (“Bankest” or the “Debtor”) filed its voluntary petition for relief under chapter 11, title 11, United States Code (the “Bankruptcy Code”). (C.P. No. 1) Schedule “F” to the Debtor’s chapter 11 petition listed Gunster as a holder of a disputed claim in the amount of $621,970.
2. Also on August 9, 2004, the Debtor filed its Combined Chapter 11 Plan of Liquidation (C.P. No. 3) and Disclosure Statement in Connection with Combined Chapter 11 Plan of Liquidation. (C.P. No. 4)
3. After 18 months of investigation, on September 9, 2004, Freeman, as the representative of the Bankest estate, filed an adversary proceeding against Gunster and Mark J. Scheer (collectively, the “Defen
4. On November 12, 2004, Gunster filed its Motion to Convert. (C.P. No. 32) Through its Motion to Convert, Gunster seeks entry of an order converting the Debtor’s chapter 11 case to a case under chapter 7 or, alternatively, appointing a chapter 11 trustee or, alternatively, appointing an examiner.
5. In footnote 1 of the Motion to Convert, Gunster states as follows:
Gunster is a defendant in an adversary proсeeding commenced by the Debtor. As such, Gunster neither consents to, nor invokes, the equitable jurisdiction of this Court. Gunster seeks to preserve its rights and defenses in the adversary proceeding, and prevent the collateral estoppel and/or res judicata effect of any order entered in these bankruptcy cases from depriving Gunster of its rights and defenses in the adversary proceeding without an opportunity to be heard.
Motion to Convert, at 1 n. 1.
6. Thus, the basis upon which Gunster asserts party-in-interest standing to prosecute the Motion to Convert is its status as a defendant in the Adversary Proceeding, and more specifically its goal of preserving its rights and defenses therein.
7. On December 1, 2004, the District Court conducted a hearing on the Abstention Motion at which Gunster’s counsel made the following statements:
Mr. Baena: “.. .the issue that emerges from this litigation is so far removed from bankruptcy that it literally has nothing to do with bankruptcy except for the fact that this lawsuit was filed by a debtor in the bankruptcy”
Transcript of Dec. 1 Hearing, at 72, lines 20-23.
Mr. Pasano: “Here, I suggest we couldn’t be farther away from something related to the bankruptcy. We are talking about a malpractice claim where the only effect on the bankrupted state [sic] is whether there is money that will come in by virtue of the claim being made. Very different.”
Transcript of Dec. 1 Hearing, at 16, lines 6-10.
Mr. Pasano: “... this ease [the Adversary Proceeding] couldn’t be farther away from what is going to be on in the collection of the effects and affairs of the bankruptcy estate.... ”
Transcript of Dec. 1 Hearing, at 18, lines 18-20.
8. On December 13, 2004, BESIL and Freeman filed the Motions to Strike. (C.P. No. 71; C.P. No. 74)
9. Also on December 13, 2004, BDO Seidman, LLP (“BDO”) filed a joinder (the “Joinder”) in the Motion to Convert. (C.P. No. 73) 1
10. The claims bar date in this case was December 22, 2004.
11. Gunster consciously elected not to file a proof of claim in Bankest’s chapter 11 case. This decision was entirely consistent with a prior pleading filed by Gunster with the District Court on December 9, 2004 in connection with the Abstention
12. On January 6, 2005, Bankest filed its First Amended Chapter 11 Plan of Liquidation (the “Amended Plan”) (C.P. No. 107), and its First Amended Disclosure Statement in Connection With First Amended Chapter 11 Plаn of Liquidation. (C.P. No. 108) The Amended Plan provides for payment in full to allowed undisputed unsecured claims.
13. In opposition to the Motions to Strike, Gunster argued at the January 13, 2005 hearing that it was still a creditor with standing under 11 U.S.C. § 1109(b) to prosecute the Motion to Convert. As set forth in its Motion to Convert, Gunster’s concerns are: (1) a misuse of the bankruptcy process, and (2) the relief sought is in the best interests of legitimate creditors. This Court finds Gunster’s concerns to be disingenuous.
14. Gunster’s motivation in prosecuting the Motion to Convert appears to be a litigation tactic. The relief sought in the Motion to Convert does not seek to maximize recovery by the estate; rather, Gun-ster’s motivation is to reduce or eliminate its exposure in the case or, at a minimum, to delay or disrupt the Adversary Proceeding. Furthermore, Gunster does not have a pecuniary or legitimate interest in these proceedings, nor does Gunster have a legally protected interest affected by these proceedings.
15. Having reviewed the Motions to Strike, the authorities cited therein, the cases provided to the Court and Movants by Gunster, the Court file, and otherwise being duly advised in the premises, the Court will grant the Motions to Strike, but only in part, as they relate to Gunster. The Court will not strike the Motion to Convert en toto as certain creditors and interested parties have filed joinders in the Motion to Convert and are relying on same to pursue the relief requested therein.
Conclusions of Law
A. Legal Standards
16.Section 1109 of the Bankruptcy Code defines who has a right to be heard in a chapter 11 case and subsection (b) thereof identifies a “party in interest.” Spеcifically, section 1109(b) provides as follows:
(b) A party in interest, including the debtor, the trustee, a creditors’ committee, an equity security holders’ committee, a creditor, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter.
11 U.S.C. § 1109(b).
17. The term “party in interest” “is defined non-exclusively to include ‘the debtor, the trustee, a creditors’ committee, an equity security holders’ committee, a creditor, an equity security holder, or any indentured trustee.’ ”
Kaiser Aerospace & Electronics Corp. v. Teledyne Indus., Inc. (In re Piper Aircraft Corp.),
18. Because there is no precise definition of the phrase party-in-interest, courts are to make this determination on a case by case basis.
In re Amatex,
19. The concept of party-in-interest standing historically developed as a flexible one to insure that all interests significantly impacted by a chapter 11 case have an adequate opportunity for fair representation.
In re Torrez,
20. Lastly, in determining party in interest standing, courts should be cautious because “[o]verly lenient standards may potentially over-burden the reorganization process by allowing numerous parties to interject themselves into the case on every issue, thereby thwarting the goal of a speedy and efficient reorganization.”
In re Ionosphere Clubs, Inc.,
21. Several courts have concluded that only creditors with some interest in a distribution from the estate or those parties with equitable claims against the estate qualify as parties in interest under section 1109(b).
See, e.g., In re Comcoach Corp.,
22. Most cases dealing with non-creditors being parties in interest “have involved contexts that lie at the heart of
23. Likewise, in
In re JMP-Newcor International, Inc.,
24. Other courts find litigants to be parties in interest if they have a “sufficient” or “practical” stake in the proceedings,
see, e.g., In re Amatex Corp.,
B. Application of Legal Standards
(i) Gunster possesses no pecuniary interest in Bankest’s estate or how or by whom it is administered.
25. The sole basis for Gunster’s аssertion of party-in-interest status in the Debtor’s main case is a litigation tactic to delay and hinder prosecution of the Adversary Proceeding with the ultimate goal to reduce the estate’s recovery in connection therewith. None of Gunster’s rights, defenses, counterclaims or third-party claims are affected by any events in the main bankruptcy case or related to the relief sought by Gunster in the Motion to Convert. In fact, Gunster admits that it is not affected by the main bankruptcy case in its Supplemental Pleading wherеin it states that “[t]he bankruptcy court can proceed to a reorganization plan without ever needing to involve itself in the issues raised in the [Adversary Proceeding].” Supplemental Pleading, at 5 n. 4. Similarly, Gunster can proceed in the Adversary Proceeding without ever getting involved in the reorganization process. These facts clearly evidence that Gunster has no direct legal interest in the outcome of the main bankruptcy case and that it lacks a “legally protected interest” that could be affected by the main bankruptcy proceedings.
26. Since Gunster did not file a proof of claim in the Bankest case, a strategic litigation decision apparently done in furtherance of Gunster’s continued assertion that it has not submitted itself, and does not consent to submitting itself, to this Court’s equitable jurisdiction, its claim is disallowed for purposes of voting on the Amended Plan or receiving a distribution
27. Another ease cited by Gunster,
In re B. Cohen & Sons Caterers, Inc.,
29. Similarly, in
Still v. Fundsnet, Inc. (In re Southwest Equip. Rental),
(ii) Gunster does not possess a “sufficient” or “practical” stake in the outcome of Bankest’s chapter 11 case or in the relief sought in the Motion to Convert.
30. Decisional law addressing the issue of whether a defendant in a prepetition lawsuit or a post-petition adversary proceeding (which is Gunster’s status here) possesses a “sufficient” or “practical” stake in a debtor’s bankruptcy case confirms that Gunster lacks party in interest standing to prosecute the Motion to Convert.
See, e.g., Alpex Computer Corp.,
31.
Peachtree Lane
Assocs.,
supra,
held that a defendant in an adversary proceeding possessed party-in-interest stand
32. At the hearing on the Motions to Strike, however, Gunster argued that the statements of counsel to Gunster, para. 7, supra, were taken out of context as having been made in connection with the Abstention Motion. Tr. at 26-27. But Gunster asserted that the statements were “absolutely ... thoughtful and consistent with everything else we are doing in this case.” Tr. at 27. The Court is not persuaded by Gunster’s assertion that the referenced statements were taken out of context. Gunster’s statements are clear and unequivocal. If the Adversary Proceeding and the main case have no connection for one purpose, they have no connection for all purposes. Bаsed on its review of the record, the Court finds no connection between the state law claims of legal malpractice and breaches of fiduciary duty being asserted against Gunster and the manner in which, or by whom, Bankest’s bankruptcy estate is or will be administered. Accordingly, Gunster lacks party-in-interest standing to prosecute the Motion to Convert.
(iii) Gunster does not possess a “legally protectible interest” in Bank-est’s chapter 11 case or in the relief sought in the Motion to Convert.
33. The above-cited cases and analyses also demonstrate that Gunster lacks a “legally protectible interest” in Bankest’s main case or, more specifically, in the relief sought in the Motion to Convert. The narrow interest Gunster identifies in its Motion to Convert, preservation of its rights and defenses in the Adversary Proceeding, is simply not implicated by the relief sought in the Motion to Convert. Gunster will be able to assert any and all defenses it deems appropriate whether the Adversary Proceeding continues to be prosecuted by Freeman, on behalf of the Debtor’s chapter 11 estate, or by a trustee in a chapter 11 case or a trustee in a converted chapter 7 case (who, as noted by the Court, Tr. at 34, might be Freeman). Because Gunster elected not to file a proof of claim, it has no pecuniary interest in this case that might otherwise entitle it to party-in-interest standing. See In re FBN Food Servs., supra.
34. It appears that Gunster, which lacks any direct interest in the relief sought in the Motion to Convert, is seeking to protect what it deems to be the interests or rights of others. In the Motion to Convert, Gunster asserts,
inter alia,
that this case, proceeding in a chapter 11 posture, is a misuse of the bankruptcy process and that it is in the best interests of the estate and “legitimate creditors” that the Court grant the Motion to Convert. Gun-ster, however, is not in a position to assert other parties’ interests or rights, even if such third parties otherwise agree with the relief sought in the Motion to Convert.
See In re Rimsat, Ltd.,
C. Conclusion
35. At the conclusion of the hearing, the Court directed the Office of the U.S. Trustee (the “UST”) to submit a report within fifteen (15) days from the date of the hearing addressing the issue of whether the Debtor’s chapter 11 case should be converted to a case under chapter 7 of thе Bankruptcy Code. The UST has filed this report with the Court, and all interested parties, including counsel for Freeman, BESIL and Gunster, have had the opportunity to review the report. Based upon a review of the UST’s report and the responses thereto, and notwithstanding the findings and rulings contained herein, the Court believes that it is in the best interest of all creditors and interested parties to allow all parties, other than Gunster, who have joined in the Motion to Convert to proceed to prosecute the motion. It is therefore
ORDERED AND ADJUDGED that the Motions to Strike are GRANTED, in part, as they relate to Gunster; however, to the extent that certain creditors and interested parties have joined in the Motion to Convert, those creditors and interested parties may proceed to prosecute the Motion to Convert.
Notes
. By agreement of Freeman, BESIL and BDO, the Motions to Strike, to the extent they were directed at BDO’s Joinder, will be heard at a later date. At such a hearing the Court will also consider the supplement to the Motion to Strike filed by BESIL which is dirеcted solely at BDO. (C.P. No. 115)
. The case law cited by Gunster for this proposition is unpersuasive.
Stamford
is otherwise distinguishable because in that case the party afforded party-in-interest status, the debtor’s principal's ex-wife, was the beneficiary of an order of the state court before which the movant's divorce proceeding with debt- or’s principal was pending which directed placement of the mortgages from and the proceeds of the sale of the debtor's primary asset to be held in escrow to satisfy the mov-ant's claims in the dissolution proceeding.