03-3188 | 3rd Cir. | Sep 24, 2004
(D.C. Civ. No. 03-cv-00842) ALITO, Circuit Judge:
District Judge: The Honorable William G. Bassler This is an appeal by the Official Committee of Asbestos Claimants (“the Argued: June 15, 2004 Committee”) from a District Court order that affirmed a Bankruptcy Court order Bankruptcy Code, 11 U.S.C. §§ 101 et seq. denying the Committee (cid:42) s motion for the G-I now operates as debtor-in-possession appointment of a chapter 11 trustee. The under 11 U.S.C. §§ 1107(a) and 1108. Committee contends that the District Court G-I, a holding company that is beneficially and the Bankruptcy Court misapplied our owned by Samuel Heyman, succeeded to decision in In re Marvel Entertainment the liabilities of GAF Corporation and the Group Inc., 140 F.3d 463 (3d Cir. 1998) Ruberoid Company. Beginning in the (“Marvel”). The Committee does not 1970s, GAF, Ruberoid, and other former dispute the proposition that, under our producers of asbestos products faced mass cases, the party seeking the appointment of tort litigation throughout the United States a trustee generally bears the burden of regarding asbestos-related injuries. Before persuasion by clear and convincing filing for chapter 11 reorganization, G-I evidence, but the Committee contends that had inherited responsibility for some what Marvel described as the strong 150,000 pending asbestos suits. In January presumption in favor of a debtor’s current 2001, pursuant to 11 U.S.C. § 1102(a), the management is inapplicable under the facts United States Trustee appointed the of this case and that the Committee’s Committee to represent persons asserting burden of persuasion was therefore asbestos tort claims against G-I. In reduced to proof by a preponderance of the November 2002, the Committee filed a evidence. Accordingly, the Committee motion for the appointment of a chapter 11 argues, the Bankruptcy Court and the trustee. The parties produced and the District Court erred in applying the clear Bankruptcy Judge reviewed more than 250 and convincing standard, and the exhibits relating to the motion, and the Committee asks us to reverse and remand Bankruptcy Judge then held a hearing. In with instructions to reconsider the support of its motion, the Committee evidence under the p reponderance advanced two arguments, only one of
which is now relevant. [1] The argument standard. Because we see no support for the proposition that the burden of persuasion in a case of this nature is ever reduced from clear and convincing [1] The first argument – that the evidence to a preponderance of the appointment of a trustee was necessary evidence, we reject the Committee’s because a panel decision of our Court, see argument and affirm the decision of the In re Cybergenics Corp., 304 F.3d 316, District Court. 332 (3d Cir. 2002) (“Cybergenics II”), rehearing en banc granted and opinion
I. vacated by Official Committee of Unsecured Creditors of Cybergenics Corp.
In January 2001, G-I Holdings, Inc. v. Chinery, 310 F.3d 785" date_filed="2002-11-13" court="1st Cir." case_name="Matthew Kiman, and United States, Intervenor v. New Hampshire Department of Corrections">310 F.3d 785 (3d Cir. 2002), (“G-I”) filed a voluntary petition for precluded the Committee from suing to reorganization under Chapter 11 of the recover property on behalf of a bankruptcy implicated in this appeal was that strong presumption” against appointing a excessive conflict between G-I and the trustee. JA30. The Court recognized that asbestos claimants warranted appointment the appointment of a trustee may be called of a trustee under both 11 U.S.C. § for when there is extreme acrimony 1104(a )(1), w hich au thorizes the between a debtor in possession and appointment of a trustee “for cause,” and creditors, but the Court found it 11 U.S.C. § 1104(a)(2), which authorizes “app ropria te to apply the usual the appointment of an outside trustee when presumption” in this case both because the appointment is “in the interests of “management of G-I ha[d] been in place creditors.” In simple terms, it is the for years and [was] familiar with the Committee’s position that G-I's current company’s operations” and because there management is subordinating the interests was insufficient evidence to show that of asbestos claimants to those of Heyman appointment of a trustee would be helpful. and favored creditors. Among other JA30. “[T]he evidence presented by the things, the Committee complains that Committee,” the Bankruptcy Court current management refused to bring concluded, did not meet the clear and fraudulent conveyance actions against convincing standard. Id. at 31. While Heyman and others, joined with a acknowledging that there was some subsidiary in litigation designed to shield “strident disagreement and litigation on the former assets of GAF’s building and critical aspects of this case,” the Court roofing products business from asbestos noted that the debtor in possession had claimants, and lavishly funded a lawsuit “shown at least a degree of willingness to charging three law firms that represent cooperate with the Committee” by asbestos claimants with racketeering, obtaining tolling agreements from Heyman fraud, and other torts. G-I, in turn, insists and other targets of avoidance actions. Id. that Heyman revived a troubled business at 32. Apparently referring to G-I’s and that current management is simply lawsuit against the law firms and the attempting to defend itself against largely Committee’s fraudulent conveyance action spurious asbestos claims. against Heyman, both of which were
pending in the Southern District of New After the hearing, the Bankruptcy York, the Bankruptcy Court also pointed Court denied the Committee’s motion. out that critical disputed issues, such as the The Court noted that the party seeking legitimacy of corporate restructurings and appointment of a trustee must prove the the litigation against the plaintiffs’ need for the appointment by clear and asbestos firm, “would be tested and convincing evidence and that there is a ultimately resolved in other proceedings.”
Id. at 33. The Committee then took an appeal to the District Court. The Committee argued that “the usual
estate – is not implicated in this appeal. presumption in favor of current management” is inapplicable in this case and convincing evidence presented in for three reasons: “(1) G-I is a holding cases in which bankruptcy trustees had company – a mere shell that operates no been appointed. Dist Ct. Op. at 18, JA 23. ‘business’ at all – and hence its existing The District Court wrote: managers’ familiarity with the business is irrelevant to the decision of whether or not [The Bankruptcy Judge] to appoint a trustee . . .; (2) because a clearly is not convinced that trustee would simply need to manage Heyman is fraudulently asbestos claims, the trustee would not need attempting to avoid asbestos to incur the usual substantial costs liability or that his control of associated with learning how to manage an G-1 renders G-1 unfit to active service company . . .; and (3) G-I serve as fiduciary for the has shown no presumptive ability to estate. She correctly notes discharge its fiduciary duties to creditors that the parties will have the given its actions and the ‘structural opportunity to test and problem’ of Heyman’s control as the ultimately resolve such dominant shareholder.” Dist Ct. Op. at 13, allegations in the other JA18. Because the usual presumption was proceedings. inapplicable, the Committee argued, the Bankruptcy Judge’s “‘reliance upon that Dist. Ct. Op. at 17, JA 22. The presumption as the basis for [her] ruling District Court also observed that “neither was an abuse of discretion per se . . .,’” Marvel nor any other case cited by the and “the Committee only had to show that parties suggests that if a court deems the a trustee w as ‘w ar ra nt ed by a presumption in favor of current preponderance of the evidence,’ rather management inapplicable, the movant than by clear and convincing evidence.” need no longer present clear and Dist. Ct. Op. at 12, JA17 (quoting convincing evidence that a trustee is Committee’s Dist. Ct. Reply Br. at 5, 21). necessary.”
The District Court affirmed the Dist. Ct. Op. at 15, JA 20. In the order of the Bankruptcy Court and issued present appeal, the Committee could have a detailed opinion explaining the basis for argued that the evidence before the its decision. The District Court held that Bankruptcy Court proved by clear and the Bankruptcy Judge “did not abuse her convincing evidence that the standard for discretion in finding that the Committee the appointment of a trustee was met and had failed to produce clear and convincing that the Bankruptcy Court erred in finding evidence of the need for a trustee under otherwise. But the Committee has elected either subsection of 1104(a)” and that not to advance this factual argument. “[t]he Committee ha[d] not proved the Instead, the Committee argues that the need for a trustee by the same type of clear Bankruptcy Court and the District Court committed two errors of law. First, the affairs of the debtor by Committee contends that “the ususal current management, either presumption in favor of existin g b e f o r e o r a f t e r t h e management” should not have been commencement of the case, applied in this case because G-I's or similar cause, but not “managers have no significant experience including the number of operating the debtor’s business . . . and holders of securities of the cannot be relied upon to discharge debtor or the amount of faithfully their fiduciary obligations to the assets or liabilities of the estate and its creditors.” Appellant’s Br. at debtor; or 20. Second, the Committee maintains that, with the presumption in favor of current (2) if such appointment is management out of the way, “[t]he in the interests of creditors, standard of proof to which the committee any equity security holders, should have been held was the normal and other interests of the ‘preponderance of the evidence’ standard.” estate , without regard to the Id. at 20. number of holders of
securities of the debtor or II. the amount of assets or liabilities of the debtor. Section 1104(a) of the Bankruptcy Code, 11 U.S.C. § 1104(a), authorizes the 11 U.S.C. § 1104(a) (emphasis added). appointment of a trustee in a chapter 11 case in two circumstances. Section “The party moving for appointment 1104(a) states: of a trustee . . . must prove the need for a
trustee under either subsection by clear and (a) At any time after the convincing evidence.” Marvel, 140 F.3d commencement of the case at 473. See also In re Sharon Steel Corp., but before confirmation of a 871 F.2d 1217" date_filed="1989-04-07" court="3rd Cir." case_name="In Re Sharon Steel Corporation, Debtor. Appeal of Dwg Corporation and Victor Posner">871 F.2d 1217, 1226 (3d Cir. 1989). If a plan, on request of a party in court finds that the moving party has interest or the United States discharged this burden, it “shall” appoint a trustee, and after notice and trustee, 11 U.S.C. § 1104(a), but a hearing, the court shall determining whether the moving party has order the appointment of a satisfied its burden under either subsection trustee- is committed to the court’s discretion.
Marvel, 140 F.3d at 471; Sharon Steel, 871 (1) for cause , including F.2d at 1225-26. f r a u d , d i s h o n e s t y , incompetence, or gross The Committee’s argument in this mismanagement of the appeal is based on our reference in Marvel
to “the strong presumption against another provision of the Evidence Rules. appointing an outside trustee.” 140 F.3d at Under Rule 301, “a presumption imposes 471. As noted, the Committee’s position on the party against whom it is directed the is that, once this presumption is out of the burden of going forward with evidence to way, a party seeking the appointment of a rebut or meet the presumption, but does trustee is no longer required to prove its not shift to such party the burden of proof case by clear and convincing evidence, but in the sense of the risk of nonpersuasion, is merely required to satisfy the which remains throughout the trial upon preponderance of the evidence standard. the party on whom it was originally set.” We see no basis for this argument. If the party against whom the presumption
is directed offers sufficient evidence “to T h ere a r e t w o p l au s i b le rebut or meet the presumption,” that party interpretations of our reference in Marvel discharges its burden of production, but to “the strong presumption against the burden of persuasion remains where it appointing an outside trustee.” The first is was at the start. See, e.g., 1 C HRISTOPHER that we employed the term “presumption” B. M UELLER AND L AIRD C. K IRKPATRICK , in the technical sense expressed in Rule F EDERAL E VIDENCE § 66 at 322 (2d ed. 301 of the Federal Rules of Evidence. The 1994). second is that we simply used that term as another way of referring to the heavy In the present case, as noted, the burden of persuasion, i.e., by clear and Committee contends that “the strong convincing evidence, that the party seeking presumption” against the appointment of a the appointment of an outside trustee must trustee is inapplicable because it is face. Although we now hold that the unwarranted by the facts. The second interpretation is the correct one, the Co mm ittee’s argu men t migh t be choice between the two interpretations has interpreted to mean either (a) that the no bearing on the outcome of this appeal presumption never properly came into play because neither interpretation supports the because the debtor bore the burden of Committee’s position. establishing the basic facts that must be
shown to give rise to the presumption and A. failed to establish those basic facts or (b) that the presumption dropped out of the As noted, the first interpretation case because the Committee adequately would read Marvel as using the term rebutted or met it. In neither event, “presumption” in a technical sense. Rule however, would the allocation or the 301 of the Federal Rules of Evidence, nature of the burden of persuasion be which applies in bankruptcy proceedings, altered. see Bankruptcy Rule 9017, governs presumptions in civil cases not otherwise Under Sharon Steel, 871 F.2d at provided for by an Act of Congress or 1226, and Marvel, 140 F.3d at 471, the party moving for the appointment of a Sharon Steel , 871 F.2d at trustee begins with the burden of 1226. “It is settled that persuasion by clear and convincing appointment of a trustee evidence. If the debtor in possession were should be the exception, required to prove certain basic facts in rather than the rule.” Id . at order to invoke the “presumption” at issue, 1225. In the usual chapter the debtor’s failure to do so would have no 11 proceeding, the debtor effect on the burden of persuasion, which remains in possession would “remain[] throughout the trial upon throughout reorganization the party on whom it was originally set.” b e c a u s e “ c u r r e n t Fed. R. Evid 301. Similarly, if the management is generally presumption arose but was sufficiently best suited to orchestrate the rebutted by the Committee, the only effect process of rehabilitation for would be to relieve the Committee of its the benefit of creditors and burden of production. Fed. R. Evid 301. other interests of the estate.” It would then be up to the Bankruptcy In re V. Savino Oil & Court to weigh all the evidence and Heating Co., 99 B.R. 518, determine whether the Committee had 524 (Bankr. E.D.N.Y . proved its case by clear and convincing 1989). Thus the basis for evidence. This is precisely what the the strong presumption Bankruptcy Court did. against appointing an
outside trustee is that there B. is often no need for one: “The debtor-in-possession is The other – and, we now hold, a fiduciary of the creditors correct – reading of Marvel is that our and, as a result, has an reference to the heavy “presumption” obligation to refrain from against the appointment of an outside acting in a manner which trustee was simply another way of could damage the estate, or referring to the heavy the burden of h i n d e r a s u c c e s s f u l persuasion (by clear and convincing reorganization.” party to evidence) that the party moving for the conduct operations during appointment of a trustee must bear. In the reorganization. Petit v. Marvel, we wrote: New England Mort. Servs. ,
182 B.R. 64, 69 (D.Me. The party moving for 199 5). T h e s t r on g appointment of a trustee . . . presumption also finds its must prove the need for a basis in the debtor-in- trustee . . . by clear and p o s s e s s i o n ’ s u s u a l convincing evidence .” See familiarity with the business it had already bee managing Furthermore, in the final sentence of the at the time of the bankruptcy passage, we cited Sharon Steel, 871 F.2d filing, often making it the at 1226, as support for the proposition that best party to conduct “the strong presumption also finds its basis operation s durin g th e in the debtor-in-possession’s usual reorganization. See Sharon familiarity with the business it had already Steel , 871 F.2d 1217" date_filed="1989-04-07" court="3rd Cir." case_name="In Re Sharon Steel Corporation, Debtor. Appeal of Dwg Corporation and Victor Posner">871 F.2d at 1226.
140 F.3d at 471 (emphasis added) (citation c o n v i n c i n g e v i d e n c e omitted). supporting the motion prior to taking such action. See,
When the references to a e.g., In re Sharon Steel, 871 “presumption” are read in the context of f.2d 1217, 1226 (3d Cir. this entire passage, it seems clear that we 1989) . . . . used the term as a synonym for the clear Petit, 182 B.R.at 69 (emphasis added). and convincing burden of persuasion. In the preceding sentence at 182 After expressly mentioning the burden of B.R. at 68, the Petit court wrote: persuasion in the first sentence of this The presumption in chapter passage, we began in the fourth sentence 11 cases is that “current to refer to the presumption without management is generally suggesting that we had moved on to a best suited to orchestrate the discussion of a new concept. In the next- process of rehabilitation for to-last sentence of the passage, we the benefit of creditors and discussed “the basis for the strong other interests of the estate.” presumption” and cited a page of a In re V. Savino Oil & bankruptcy court opinion that refers to the Heating Co., 99 B.R. 518, clear and convincing evidence burden of 524 ( Bankr. E.D.N.Y. persuasion. See Petit, 182 B.R. at 69. [2] 1989). (emphasis added). It is thus apparent that the Petit [2] On the cited page, Petit states: court used the term “presumption” as The party seeking the another way of referring to the burden of trustee’s appointment has persuasion. This interpretation is the burden of establishing reinforced by the fact that the sentence in the need for such action and, In re V. Savino Oil & Heating Co., 99 although the Court of B.R. at 524, that the Petit court partially Appeals for the First Circuit quoted used the term “assumption,” not has never held so directly, “presumption.” This shows that the Petit many courts require a court did not use the term “presumption” showing of clear and in its technical sense.
been managing at the time of the sometimes required to prove its case by bankruptcy filing.” Marvel, 140 F.3d at clear and convincing evidence. 471. Sharon Steel, however, while According to the Committee, if the debtor referring to the clear and convincing in possession lacks special expertise in burden of persuasion, makes no reference running the business and the appointment to the concept of a presumption. For all of a trustee would not impose large costs, these reasons, we interpret Marvel’s use of the party seeking the appointment of a the term presumption as simply referring trustee need only prove its case by the to the burden of persuasion, and not to the preponderance of the evidence. This concept of a presumption in the sense in argument is not only inconsistent with our which the term is used in the law of prior cases, but it advocates an awkward evidence. and unorthodox procedure. Whether a
debtor in possession possesses special When Marvel is read in this way, expertise and whether the appointment of we see no basis for arguing that it was a trustee would be costly will often be improper to apply the clear and convincing contested, as they are here. In the standard in this case. In Sharon Steel, 871 Committee’s view, a bankruptcy court F.2d at 1226, we stated without would first be required to make findings qualification that “[t]he party moving for on those questions; then, depending on the appointment of a trustee . . . must those findings, it would identify the prove the need for a trustee . . . by clear applicable burden of persuasion; and and convincing evidence,” and in Marvel, finally, it would determine whether the 140 F.3d at 471, we quoted and applied applicable burden had been met. This this rule. Our further statement in Marvel, cumbersome and strange procedure has 140 F.3d at 471, that “[t]he facts . . . little to recommend it. militate[d] against invoking [the] presumption,” meant that the facts As Sharon Steel stated, the party satisfied the clear and convincing burden. asking for the appointment of a trustee In order for the Committee to prevail in bears the burden of persuasion by clear the present case, it too was obligated to and convincing evidence. This burden overcome that burden, but the Committee, does not shrink or shift. Whether the as noted, does not argue in this appeal that debtor in possession has special expertise the Bankruptcy Court abused its discretion and whether the appointment of a trustee in finding that the burden was not met. would entail substantial costs are relevant
factors to be considered in determining What the Committee now seeks is a whether this burden has been met in a modification of the rule that we adopted in particular case. Sharon Steel. The Committee in effect asks us to hold that the party moving for the appointment of a trustee is only
III. For the reasons set out above, the order of the District Court is As we have noted, the Committee affirmed. could have argued that the evidence that it offered in the proceeding before the Bankruptcy Court was so strong that the Bankruptcy Court had no choice but to find that the Committee had proven that the conditions for the appointment of a trustee were present. This argument, howe ver, would have faced two formidable obstacles: the abuse of discretion standard of appellate review and the clear and convincing burden of persuasion. The Committee chose not to attempt to surmount those obstacles, and thus this factual argument is not before us.
We add, however, that if the argument were before us, we would hold that the Bankruptcy Court did not abuse its discretion in finding that the conditions for the appointment of a trustee were not established by clear and convincing evidence. There is unquestionably considerable acrimony between the debtor and the asbestos claimants, but as the Bankruptcy Court noted, some of the most contentious disputes will presumably be addressed in other pending litigation, and it was the Bankruptcy Court’s judgment that the debtor in possession would be able to discharge its fiduciary obligations with regard to other matters. W e cannot say that the Bankruptcy Court abused the broad discretion that it possesses in determining whether the conditions specified in 11 U.S.C. § 1104(a) have been adequately shown.