MEMORANDUM OPINION AND ORDER DENYING MOTION FOR APPOINTMENT OF CHAPTER 11 TRUSTEE OR, IN THE ALTERNATIVE, CONVERSION OF THE CASE TO A CASE UNDER CHAPTER 7
This matter is before the Court on motions filed by the U.S. Trustee and several parties in interest, seeking the appointment of a chapter 11 trustee pursuant to § 1104 of the Bankruptcy Code and Bankruptcy Rule 2007.1, or in the alternative, a conversion of the case to a case under chapter 7 pursuant to § 1112 of the Bankruptcy Code (the “Trustee Motions”). The Debtors filed an objection to the Trustee Motions on June 8, 2007, and thereafter the U.S. Trustee, several creditors, and
I. BACKGROUND
A. The Parties
On May 14, 2007 (the “Petition Date”), The 1031 Tax Group, LLC and the other debtors (collectively, the “Debtors”) filed for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. The Debtors continue to operate their businesses (primarily in a wind-down or liquidation mode) as debtors in possession under §§ 1107 and 1108. The 1031 Tax Group, LLC is the direct or indirect parent of the other Debtors. See Debtors Rule 1007 Affidavit ¶ 11, at Exhibit A (Debtor’s Organization Chart) (“1007 Affidavit ”) (ECF No. 2). The Debtors are “qualified intermediaries,” or “QIs,” and are engaged in the business of providing custodial services to individuals and entities conducting property exchanges under § 1031 of the Internal Revenue Code, 26 U.S.C. § 1031. See 1007 Affidavit ¶ 7-8. The main purpose of a § 1031 like-kind exchange is to defer capital gains tax resulting from the sale of investment property. U.S. Trustee’s Motion Directing the Appointment of a Chapter 11 Trustee, ¶2 (“U.S. Trustee’s Motion”) (ECF No. 106). As of the Petition Date, there were over 300 open exchange contracts with the Debtors representing an estimated liability of $151 million. 1007 Affidavit ¶ 13.
Edward H. Okun (“Okun”) is the sole member of the main Debtor, The 1031 Tax Group, LLC, and was the sole manager or sole director of each of the Debtors.
Voluntary Petition for each Debtor, Written Consent in Lieu of Meeting of the Sole Member
(ECF No. 1);
1007 Affidavit
¶ 10. Okun acquired all of the Debtor entities between August 2005 and December 2006 with a business strategy of “rolling up” regional qualified intermediaries into a national firm.
1007 Affidavit
¶ 11. Okun is also the sole shareholder of Okun Holdings, Inc. (“Okun Holdings”), an entity that was intended to act as a holding company
B. The Debtors’ Liquidity Crisis Leads to Bankruptcy Filing
The allegedly unauthorized borrowing of funds by IPofA from the Debtors, and IPofA’s failure to repay such funds are the primary reasons for the Debtors’ bankruptcy filings on May 14, 2007. 1007 Affidavit ¶¶ 22-23. Specifically, IPofA and Okun Holdings engaged in intercompany transactions with the Debtors, in the form of a series of unsecured promissory notes (the “Affiliate Notes”). The Affiliate Notes are in writing, generally provide for market rates of interest, maturity dates and, in the event of non-payment, penalty interest provisions. The maturity of each Affiliate Note generally was one hundred and eighty (180) days, although certain Affiliate Notes contained different maturity timetables, or were payable on demand. Id.; Declaration of Andrew Velez-Rivera ¶ 14 (ECF No. 106). The funds represented by the Affiliate Notes were “borrowed” from the Debtors, and in turn used by Okun to invest in the business and investment activities of non-debtor entities owned or controlled by Okun, principally IPofA. 2 Joint Disclosure Statement, at 11.
While the Debtors contend that some cash payments were made in respect of the Affiliate Notes, the Affiliate Note balance grew from approximately $55 million at December 31, 2005, to approximately $113 million at December 31, 2006, and approximately $132 million (without accrued non-default interest) at May 11, 2007. Id. at 12. As of the Petition Date, the net balance due to the Debtors on the outstanding Affiliate Notes was approximately $137 million in principal and accrued interest at non-default contractual rates. Id. These Affiliate Notes represent the single most significant asset of the Debtors’ estates; however, the value of the Affiliate Notes is, according to the Debtors, “speculative.” Id. Various parties to Exchange Agreements, the U.S. Trustee, and others have made allegations that the funds in question were not borrowed, but instead were improperly diverted by Okun from the Debtors. 3
In addition to the issues relating to the Affiliate Notes, according to Okun, the Debtors’ liquidity crisis was further exacerbated by Debtors’ employees in Denver and in San Jose who allegedly opened local bank accounts without the knowledge of
Faced with an impending financial crisis, the Debtors retained Dreier LLP (“Dreier”) as it counsel and Huron Consulting Service LLC (“Huron”) as its restructuring professionals. On May 8, 2007, Huron and Dreier, on behalf of the Debtors, and Okun and outside counsel to Okun Holdings, began negotiations in an attempt to stabilize the Debtors’ businesses and possibly avoid bankruptcy filings. 1007 Affidavit ¶ 20. As a result of the negotiations Okun executed a personal guarantee of the Affiliate Notes (ECF No. 211, Exhibit A), and he agreed “in principal” to collateralize the guarantee with a collateral package of assets of IPofA and/or other non-debtor entities controlled by Okun, in an effort to facilitate repayment of creditors’ claims. Id. Since the chapter 11 filings, the Debtors, the Creditors Committee, Okun’s counsel and JPS Capital Partners, LLC (“JPS”), a prospective lender, have been working to collateralize and monetize Okun’s non-debtor assets to obtain financing to fund a reorganization plan. On July 19, 2007, the Debtors and the Creditors Committee filed a Joint Plan of Reorganization (the “Plan”) that contemplates funding through a Plan Funding Agreement, secured by Okun’s non-debtor assets. 4 (ECF No. 409). On July 29, 2007, the Debtors and the Creditors Committee filed the proposed Joint Disclosure Statement. (ECF No. 457).
B. Prepetition Changes in the Debtors’ Management
Presumably, at least in part, to avoid the appointment of a chapter 11 trustee, on May 11, 2007, James R. Lukenda (“Luken-da”), the Managing Director of Huron, was formally engaged as the Chief Restructuring Officer for the Debtors.
See Written Consent in Lieu of Meeting of the Sole Member of the 1031 Tax Group, LLC
(“Resolutions”) (ECF No. 1). Okun executed the resolutions effectuating the appointment on May 12, 2007.
5
Resolutions
(ECF No. 1). In its first day declarations, the Debtors indicated that they anticipated hiring “an independent sole Manager,” to assume Okun’s duties as sole member to act as the Debtors’ board of directors.
1007 Affidavit,
Schedule 12. Pursuant to a letter dated May 25, 2007 (the “Irrevocable Delegation Letter”), Okun delegated the authority to appoint the Manager to
II. DISCUSSION
Section 1104(a) of the Bankruptcy Code governs appointment of a chapter 11 trustee. It provides:
a) At any time after the commencement of the case but before confirmation of a plan, on request of a party in interest or the United States trustee, and after notice and a hearing, the court shall order the appointment of a trustee—
(1)for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause, but not including the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor;
(2) if such appointment is in the interests of creditors, any equity security holders, and other interests of the estate, without regard to the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor; or
(3) if grounds exist to convert or dismiss the case under section 1112, but the court determines that the appointment of a trustee or an examiner is in the best interests of creditors and the estate.
11 U.S.C. § 1104(a).
The appointment of a chapter 11 trustee is an extraordinary remedy.
In re Euro-American Lodging Corp.,
A. Section 1104(a)(1) — Appointment of a Chapter 11 Trustee for “Cause”
The U.S. Trustee’s principal argument has been that a chapter 11 trustee must be appointed because there is “cause” within the meaning of § 1104(a)(1). The appointment of a chapter 11 trustee is authorized upon the showing of cause— inclusive of fraud, dishonesty, incompetence or gross mismanagement of the debtor’s affairs by
current management.
11 U.S.C. § 1104(a)(1). Once the court makes a finding that cause exists under § 1104(a)(1), “there is no discretion; an independent trustee must be appointed.”
In re V. Savino Oil & Heating Co., Inc.,
1. The Applicability of § 1101(e)
Section 1104(e) was added to the Bankruptcy Code and became effective in October 2005.
See
11 U.S.C. § 1104(e) (“The United States trustee
shall
move for the appointment of a trustee under subsection (a) if there are reasonable grounds to suspect that current members of the governing body of the debtor, the debtor’s chief executive or chief financial officer, or members of the governing body who selected the debtor’s chief executive or chief financial officer, participated in actual fraud, dishonesty, or criminal conduct in the management of the debtor or the debt- or’s public financial reporting.”) (emphasis added);
see generally
7 Collier on Bankruptcy ¶ 1104.02 (15th ed. rev.2007). The section was introduced into the Senate version of the bill late in the legislative process and there is little legislative history
Where an allegedly tainted “current member of the governing body of the debtor,” 11 U.S.C. § 1104(e), has selected or appointed new management, as is the case with Okun, particularly if it is done immediately prepetition or postpetition, as occurred in this case, the U.S. Trustee acts prudently when she challenges whether new management is tainted by an association with, or selection or appointment by, the governing body. But the statutory requirement that the U.S. Trustee bring such a motion does not alter the standard for deciding whether to grant the motion. Rather, § 1104(a)(1) & (2), and the cases interpreting these subsections, continue to control whether a trustee should be appointed. See Norton Bankruptcy Law and Practice 2d § 79.3 (database updated June 2007) (“The addition of Code § 1104(e) in 2005, providing that the U.S. trustee must move for the appointment of a trustee when there is evidence of managerial participation in fraud, dishonesty, or criminal conduct in management of the debtor ... underscores congressional concern that untrustworthy management be removed in favor of a trustee. But while the 2005 Amendment mandates that a motion be made in the face of such evidence, it did not change the standards for mandatory or discretionary appointment of a trustee under Code § 1104(a) and (b).”).
The Court has not found any cases that have interpreted or applied § 1104(e). While prior case law establishes that the U.S. Trustee as the moving party bears the burden of proving “cause” by clear and convincing evidence, the Court believes that where the U.S. Trustee establishes a
prima facie
case that a tainted current member of the governing body
2. The Debtors Have Met Their Shifting Burden
Whether Okun retained or exercised management authority, whether the Debtors’ appointments of Lukenda and Moran were made in accordance with applicable state laws, and whether Lukenda and Moran are independent and unconflicted, were disputed issues of fact that necessitated scheduling the July 11, 2007 evi-dentiary hearing. Both prepetition and since the U.S. Trustee and several creditors filed the Trustee Motions, the Debtors and Okun have taken steps to put to rest the U.S. Trustee’s concern that Okun retains management authority and control of the Debtors. First, Huron’s consulting agreement, approved on an interim basis by the Court on May 22, 2007, and approved finally on July 3, 2007, provides that Huron and Lukenda would manage the Debtors’ operations (ECF No. 11), and the Irrevocable Delegation Letter expressly provides that Lukenda and Moran will not report to or receive instructions from Okun (ECF No. 276).
Second, in response to continuing questions by the U.S. Trustee and the Court whether Okun has irrevocably transferred management authority, Okun’s counsel agreed on the record in open court that Okun has irrevocably transferred management authority during the pendency of the chapter 11 cases, a representation which the Debtors contend and the Court concludes is enforceable by judicial estoppel.
See June 11, 2007 Hearing Transcript
at 122-23 (ECF No. 269);
Maharaj v. Bankamerica Corp.
Third, in response to the U.S. Trustee’s contention that Lukenda, as Chief Restructuring Officer, did not have the authority to appoint Moran as sole manager, sole director or partner — in effect, to appoint Moran as Lukenda’s boss — Okun signed the Ratification Letter, ratifying and confirming Lukenda’s selection of Moran to fill each of the designated roles. (ECF No. 360). Okun’s signing of the Ratification Letter at Lukenda’s request was a ministerial act rather than the exercise of management authority. While the U.S. Trustee disputes Lukenda’s authority to make the selection, the Ratification Letter and subsequent changes in the Debtors’ organizational documents have assured that Moran is properly authorized to fill his designated roles.
Finally, in response to the Court’s opinion conditionally approving Moran’s consulting agreement, the Debtors and Okun have taken additional steps, in accordance with applicable state laws, to change the governance structure of each of the Debtors, removing Okun and replacing him with Moran as sole manager, sole director or partner of the Debtors.
Cf. In re Bayou Group, LLC,
Based on the evidentiary record, and applying the suggested burden shifting standards here, the Court concludes that the motion for appointment of a chapter 11 trustee for “cause” under § 1104(a)(1) must be denied. The U.S. Trustee established a prima facie case of fraud by Okun. However, establishing fraud by a member of the Debtors’ governing body that appoints new management is by itself insufficient to require the appointment of a trustee. The issue is whether current management is tainted. Okun is the sole member of The 1031 Tax Group, LLC, and he made the appointment of Lukenda as Chief Restructuring Officer. While Lukenda’s position is not one of those specifically identified in § 1104(e), ie., chief executive officer and chief financial officer, Okun “irrevocably delegated” all management authority to Lukenda, at least until a new sole manager was selected, functionally making Lukenda the chief executive officer. 13 Moran, the new sole manager, director or partner of the Debtors, was not selected or appointed by Okun, other than for the ministerial acts required to confirm the appointment or election of Moran in accordance with applicable state laws, but the U.S. Trustee challenged Moran’s seleetion by Lukenda. Even assuming that the U.S. Trustee made the necessary initial showing challenging the selections of Lukenda and Moran, the Debtors and Creditors Committee in opposing the appointment of a chapter 11 trustee easily met the shifted burden, establishing that Lukenda and Moran — Debtors’ current management — are independent, unconflicted, and in no way beholden to Okun or prior management. Furthermore, the evidence established that since the filing of the chapter 11 cases, Okun has taken no actions to interfere with the management authority or decisions by Lukenda and Moran. The evidentiary record also clearly establishes that Lukenda and Moran had no prior association with Okun or the Debtors. They are experienced professionals clearly qualified for the important roles they have been appointed or elected by the Debtors to fill. With the ultimate burden then shifted back to the U.S. Trustee, she failed to establish “cause” for the appointment of a chapter 11 trustee under § 1104(a)(1).
B. Section 1104(a)(2)Appointment of a Chapter 11 Trustee When In The Creditors’ Best Interests
Even if the Court does not find that “cause” exists to appoint a chapter 11 trustee under § 1104(a)(1), the Court may still appoint a trustee if it is in the “interest of the creditors ... and other interests of the estate.” 11 U.S.C. § 1104(a)(2). Section § 1104(a)(2) “envisions a flexible standard” and “gives the district court discretion to appoint a trustee when doing so would serve the parties’ and estate’s interests.”
In re Marvel Entertm’t,
140 F.3d
While the Court has concluded that the U.S. Trustee failed to establish “cause” for the appointment of a chapter 11 trustee based on the contention that current management remains tainted by the timing and manner of their appointment or election, those same circumstances surrounding the selection of new management are relevant considerations applying factors (i) and (iii) of the
Euro-American
and
Ionosphere Clubs
factors quoted above,
see Euro-American,
But there are additional factors to consider. Where a case has an active creditors committee functioning effectively and working well with the debtors, as it does here, there is little benefit in appointing a trustee. Particularly as these cases have unfolded, real progress has been made through the joint efforts of the Debtors’ new management and the Creditors Committee. As already stated, the Creditors Committee strongly opposes the motion, including through the testimony of the Co-Chairman of the Committee. The Debtors and the Creditors Committee have now presented for hearing a proposed Joint Disclosure Statement (ECF No. 457) and Plan (ECF No. 409). Court hearings on both have already been set, and while no assurance can be given that approval of the Court and the creditor body (if submitted to a vote) will be given, these steps so early in this difficult case are important. The evidence demonstrated that ordering the appointment of a chapter 11 trustee now would threaten these positive developments.
See Testimony of John Benitez, July 11, 2007 Hearing Transcript
at 161-
A major factor in these cases affecting the Creditors best interests is the issue of time. 15 Because of the 180 day time limit to complete a § 1031 like-kind exchange— which the court does not have the authority to extend — all of the constituents have a strong interest in confirming a viable Plan as expeditiously as possible. Exchange participants will avoid loss of their funds, adverse tax consequences and, possibly, additional potentially unrecoverable damages, if they can close their open exchange transactions within the applicable time limits; the Debtors will avoid additional consequential damages claims to the extent that open exchange transactions can be salvaged; and exchange participants who can no longer avoid the adverse tax consequences and possibly other damages from missed deadlines will be benefited to the extent that total claims against the Debtors are reduced in the event there is not enough money available for a full recovery by everyone. Therefore, the Court concludes based upon consideration of all of the evidence, and the exercise of the Court’s discretion, that the appointment of a trustee is not in the creditors’ best interests. For that reason, the motion for appointment of a chapter 11 trustee under § 1104(a)(2) should be denied.
C. Conversion Pursuant to § 1112(b) To A Case Under Chapter 7
The Trustee Motions 16 argued in the alternative that the case should be converted to a case under chapter 7 because “cause” exists under § 1112(b) of the Bankruptcy Code. Section 1112(b)(1) provides:
(b)(1) Except as provided in paragraph (2) of this subsection, subsection (c) of this section, and section 1104(a)(3), on request of a party in interest, and after notice and hearing, absent unusual circumstances specifically identified by the court that establish that the requested conversion or dismissal is not in the best interests of creditors and the estate, the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, if the movant establishes cause.
11 U.S.C. § 1112(b)(1). The bankruptcy court has wide discretion to determine if cause exists and how to ultimately adjudicate the case.
In re State St. Assoc.,
The moving parties have failed to establish that “cause” exists for the appointment of a trustee. Even if such “cause” does exist the Court finds that conversion is not in the estates’ or the creditors’ best interest. The fact that there is a continuing loss to the estate, due to the mounting administrative costs and the lack of any new business entering the estate, is insufficient to establish “cause” within the meaning of § 1112(b).
In re Photo Promotion Assocs., Inc.,
III. CONCLUSION
For the foregoing reasons, the Trustee Motions to appoint a chapter 11 trustee, or
IT IS SO ORDERED.
Notes
. The Debtors are: The 1031 Tax Group, LLC; 1031 Advance 132 LLC; 1031 Advance, Inc.; 1031 TG Oak Harbor LLC; Atlantic Exchange Company, Inc.; Atlantic Exchange Company LLC; Exchange Management, LLC; Investment Exchange Group, LLC; National Exchange Accommodators, LLC; National Exchange Services QI, Ltd.; National Intermediary, Ltd.; NRC 1031, LLC; Real Estate Exchange Services, Inc.; Rutherford Investment LLC; Security 1031 Services, LLC; and Shamrock Holdings Group, LLC. The Debtors moved to dismiss the bankruptcy proceedings of Exchange Management, LLC, Case No. 07-11454, and National Intermediary, Ltd., Case No. 07-11458. An order dismissing these cases was entered on June 11, 2007. The Debtor AEC Exchange Company, LLC filed its voluntary petition for relief under chapter 11 of the Bankruptcy Code on June 11, 2007. The Debtors’ cases are being jointly administered.
. The U.S. Trustee and other parties in interest contend that the loans from the Debtors to IPofA were funded with proceeds of the sales of exchange participants’ properties, without the exchange participants' authorization or knowledge. Velez-Rivera Declaration ¶ 15.
. The Debtors have advised that the United States Postal Inspector, in conjunction with the United States Attorney for the Eastern District of Virginia (Richmond Division) (“U.S. Attorney”), has been conducting an investigation into the Debtors and certain of Okun's non-debtor affiliates. Although specific details concerning the precise nature and focus of the investigation are confidential, the Debtors advise that the investigation in part concerns the circumstances surrounding the transfer of funds by certain of the Debtors to non-debtor affiliates of Okun in the period prior to the commencement of the chapter 11 cases. The Debtors have stated that since the Petition Date, they have been cooperating with authorities, including the U.S. Attorney in connection with its investigatory efforts. Joint Disclosure Statement, at 12.
. Okun also agreed not to transfer or otherwise encumber non-debtor property pending further order of the Court. (ECF No. 277).
. The U.S. Trustee previously filed objections to the retention of Huron and Dreier LLP, claiming that neither was disinterested and, therefore, should not be retained. The United States Trustee’s Objections to Debtors’ Application to Retain Dreier LLP as Counsel ("Dreier Objection’’) ¶¶ 13-23 (ECF No. 24, 145). On May 17, 2007, the Court entered an interim order approving retention of Huron and Dreier. (ECF No. 57, 59). A final hearing on the retention applications was held on July 2, 2007. The Court overruled objections by the U.S. Trustee and other parties in interest and approved the Huron and Dreier final retention applications. (ECF No. 333, 334). In entering the final retention orders, the Court necessarily overruled the objections that Dreier, Lukenda and Huron are conflicted because they were initially selected by Okun, with their retainers paid by IPofA. The evidence at the July 11, 2007 evidentiary hearing further supports and confirms that Lukenda and Huron are independent and unconflicted.
. The Debtors reported to the Court on the completion of these governance changes in a report dated July 27, 2007, attaching copies of each of the documents by which the changes were effected. (ECF No. 447).
. "This provision was added to the Bankruptcy Abuse Prevention and Consumer Protection Act during Senate Judiciary Committee mark-up of the bill, late in the bill's eight-year journey through Congress. As a result, there is very little legislative history or analysis to shed light on its meaning or probable operation.” 7 Collier on Bankruptcy ¶ 1104.02.
. Commentators have raised questions about the standard that applies in determining reasonable suspicion. See Norton Annual Survey of Bankruptcy Law Part III § 34 (Sept.2006) (“While at first blush newly added § 1104(e) appears straightforward, there is very little legislative history or analysis underlying its enactment to help explain how the subsection should operate in practice, and consequently several significant questions remain unanswered. For example: (1) under what standard (objective or subjective) should a trustee determine that 'reasonable' grounds exist to suspect that fraudulent, dishonest or criminal conduct has occurred?....”); 7 Collier on Bankruptcy ¶ 1104.02 ("The second question is what constitutes 'reasonable grounds to suspect.’ Although the placement of the word 'reasonable' raises a possible question, the phrase as a whole suggests that the provision should apply only where it is reasonable, as an objective matter, for the United States trustee to suspect that one of the triggering grounds applies. Because of the risk of disruption that a contested trustee motion can create, the United States trustee should use appropriate discretion in evaluating whether there are ‘reasonable grounds to suspect.’ ”)
. It is important to note that "reasonable grounds” to suspect fraud is not the same as establishing a prima facie case of fraud.
. Difficult questions could be presented if a ” new chief executive officer or chief financial officer reported to an allegedly tainted officer or board, or if some but not all board members are allegedly tainted. In this case, even though Okun remains the sole member of The 1031 Tax Group, LLC, the changes in the Debtors' organizational documents pursuant to applicable state laws, and the Irrevocable Delegation Letter signed by Okun, have stripped Okun of his power to exercise management authority or control. Moran and Lukenda may not take instructions from Okun, and the evidence shows that Okun has not attempted to exercise any management authority and can no longer do so in any event. The Court has expressly found, based on the evidence in the record, that Moran and Okun are independent and unconflicted.
. The U.S. Trustee also appears to challenge the Debtors’ authority to replace the management of a debtor in possession, even though the change was made prior to the bankruptcy filing, and asserts that the Debtors have asked the court to approve Lukenda to act as a "quasi-trustee.” The U.S. Trustee asserts that "Congress has only provided one way to replace the management of a debtor in possession, i.e., the appointment of a trustee pursuant to § 1104(a).” The Court rejects this argument outright because nothing in the Bankruptcy Code precludes a debtor in possession from making necessary changes to its management while in bankruptcy. In fact, the Code requires the debtor to continue to run the debtor’s day-to-day operations and make the necessary changes to the business to provide for a successful reorganization. However, § 1104(a)(1) requires the Court, if a motion to appointment a trustee is made, to examine the integrity of the new management.
. John Benitez, the Co-Chairman of the Creditors Committee, also testified at the July 11 hearing. Benitez has been deeply involved on behalf of the Creditors Committee in the ongoing negotiations of the Plan and the Plan Funding Agreement. He testified that he has not seen any evidence that the Debtors are taking instruction or assistance from Okun. Id. at 160. He further testified that in negotiations, the Debtors have taken positions concerning Okun that may have been harsher than the Committee’s position. Id. at 160-61.
Moran also testified at the July 11 hearing, explaining that he understood that he would primarily be acting as a manager, or a sole director of the Debtors, and the Debtors' management would report to him.
July 11, 2007 Hearing Transcript
at 139. Moran further testified that he understood that he had a fiduciary duty to the Debtors' constituents, and that he would exercise his independent judgment as to any proposed settlement that could be reached.
Id.
at 142. In approving
. See 7 Collier on Bankruptcy § 1104.02 ("Another question is which of the debtor's directors and officers are covered by the provision [of § 1104(e)], Clearly, the chief executive officer and the chief financial officer are covered. That should be the case whether or not they actually hold those titles. For example, if the most senior executive office has the title of 'president,' the provision should apply; similarly if the most senior finance executive is the controller or vice president-finance.”).
.At the July 11, 2007 evidentiary hearing, John Benitez, the Co-Chairman of the Creditors Committee, testified persuasively against the appointment of a trustee. Benitez gave several reasons, including: the time delay; the additional cost to the estate; the effect that the negotiations with JPS; and the concern that JPS would not look favorably on the appointment of a trustee because the negotiations have largely been completed. July 11, 2007 Hearing Transcript at 161-63. For example, with respect to the issue of timing, Benitez stated:
[W]e’re in a very delicate timeframe that things have to happen very quickly. We have to get the plan, we have to get the disclosure statement, we have to get that before the Court, we absolutely have to get information out to the creditors. And the timing is very, very critical. So to the extent there’s and advent of another person in the process it may well, and my sense is it may slow down the process.
Id. Further, Benitez indicated that an important intangible factor was the effect a trustee would have on the negotiations with Okun and JPS. At this stage all of the "pieces of the puzzle” have at least been identified. Id. at 162. A trustee who would rightly want to become involved in the process and would need time to educate himself, and would likely not add value to the process. Id.
. The U.S. Trustee challenges the assertion that the appointment of a trustee will create a time delay. The Trustee has stated that it has interviewed several candidates for the trustee position (including Moran), the candidates are aware of the general events surrounding the case, and are ready and prepared to assume the role of trustee. The Court believes that the appointment of a chapter 11 trustee at this stage will delay the proceedings and perhaps threaten the sensitive negotiations that have been conducted leading to the proposed Plan.
. Although the U.S. Trustee makes this alternative argument, the U.S. Trustee's brief stated that she prefers the appointment of a chapter 11 trustee at this time. The U.S. trustee notes that where some moving creditors favor conversion due largely to the desire to curb administrative expenses, most notably the expenses of a committee, this monetary concern is insufficient to override the statutory framework of § 1104(a)(3). Further, the U.S. Trustee notes that due to the inherently personal nature of the debtors’ customers, an official committee could well serve its constituents.
. The exception to conversion under § 1112(b)(2) is inapplicable here because the creditors seek conversion based on the loss and diminution of estate assets and absence of a reasonable likelihood of rehabilitation.