In re JOHNS-MANVILLE CORPORATION et al., Nos. 82 B 11656
through 11676.
MANVILLE CORPORATION, Plaintiff-Appellee,
v.
The EQUITY SECURITY HOLDERS COMMITTEE, A.F. Investments and
Bankers National Life Insurance Company and Centerre Trust
Company of St. Louis and Clayton & Dubilier Inc. and Leon B.
Dubin and the Independent Insurance Group, Inc. and Bertrand
A. McKittrick and Shlomo Nutovic and Raytheon Financial
Corporation and Leonard Starobin (Starr) as Members of the
Equity Security Holders Committee, Defendants-Appellants,
Committee of Unsecured Creditors, Committee of Asbestos
Health Related Claimants and/or Creditors ("Asbestos Health
Committee"), Securities and Exchange Commission and Leon
Silverman, the Legal Representative, Parties in Interest.
No. 1522, Docket 86-5031.
United States Court of Appeals,
Second Circuit.
Argued June 12, 1986.
Decided Sept. 10, 1986.
George Hahn, New York City (Hahn and Hessen, New York City, of counsel), for defendant-appellant, The Equity Sec. Holders Committee.
Richard Kirby, Washington, D.C. (Daniel L. Goelzer, Paul Gonson, Jacob H. Stillman, Stephen M. DeTore and Batya Roth, S.E.C., Washington, D.C., of counsel), for plaintiff-appellee, S.E.C.
Michael Crames, New York City (Levin & Weintraub & Crames, New York City, of counsel), for plaintiff-appellee, Manville Corp.
Elihu Inselbuch, New York City (Gilbert, Segall & Young, New York City, of counsel), for plaintiff-appellee, Committee of Asbestos Health Related Claimants and/or Creditors.
Matthew Gluck, New York City (Fried, Frank, Harris, Shriver & Jacobson, New York City, of counsel), for plaintiff-appellee, The Legal Representative.
Before OAKES, ALTIMARI, and MAHONEY, Circuit Judges.
MAHONEY, Circuit Judge:
This action, one segment in a long-running Chapter 11 reorganization proceeding, arose in consequence of the competing interests of creditors, stockholders, and the board of directors in the development of rehabilitation plans for appellee, the Manville Corporation ("Manville"), formerly Johns-Manville Corporation. Appellants are the Equity Security Holders Committee and individual members of that committee (collectively the "Equity Committee"), appointed by the bankruptcy court to represent the interests of stockholders in Manville's reorganization.1 The Securities and Exchange Commission, although technically an appellee, shares the interests of the Equity Committee in the matter at hand.2 Manville is aligned for purposes of this appeal with the Committee of Asbestos Health Related Claimants and/or Creditors (the "Asbestos Health Committee"), which represents the interests of the victims of diseases resulting from exposure to asbestos who have presently existing claims in tort against Manville, and with the Legal Representative, who represents the interests of future claimants who have not yet manifested such diseases.
The instant conflict arises in part because each of the committees representing the various interests in Manville must depend upon the Manville board of directors to advance those interests in the bankruptcy court at this stage of the rehabilitation proceedings. As debtor, Manville had the exclusive right under the Bankruptcy Code to file rehabilitation plans for the first 120 days of reorganization, and the bankruptcy court in these proceedings has granted Manville several extensions prolonging its exclusive filing period. See 11 U.S.C. Sec. 1121(b), (d) (1982 & Supp. III 1985). Therefore, although in theory each of the committees may one day have the opportunity to submit a rehabilitation plan to the bankruptcy court if Manville's own proposals are rejected or if a trustee is appointed to replace the Manville board, see id. Sec. 1121(c), Manville has for three or four years enjoyed the exclusive right, after negotiating with the committees, to file proposed plans. And although any of the committees may decline to accept a plan submitted to the bankruptcy court for confirmation, the power to formulate such plans in the first instance or at least to exercise a voice in their formulation is clearly a desideratum under the program laid down by the Bankruptcy Code, because the bankruptcy court may confirm a plan with or without the acquiescence of all classes of claims. If any impaired class3 rejects Manville's proposed plan, the court will nevertheless confirm it, upon Manville's request, so long as at least one impaired class has accepted the plan and so long as the court determines that the plan "does not discriminate unfairly" and is "fair and equitable" to each impaired class that has not accepted it. 11 U.S.C. Sec. 1129(b)(1) (1982 & Supp. III 1985).
In order to channel negotiations toward acceptable plans, the various factions interested in Manville's rehabilitation have formed ad hoc alliances when the occasion has called for them. The challenge all the committees have faced is to fashion a plan that will preserve Manville's capacity to generate enough revenue to pay existing creditors, to cover its liabilities to present and future tort claimants where liability is certain though its precise extent is unknown, and to satisfy Manville's shareholders. The seemingly strange bedfellows in the instant litigation, Manville and the committees representing present and future tort claimants, have long struggled to devise a reorganization plan acceptable to each. Along the way they have at times been antagonists rather than allies. For example, the Asbestos Health Committee opposed Manville's first proposed plan, sanctioned by the Equity Committee and filed on November 21, 1983. Other disputes, such as the Asbestos Health Committee's initial refusal to represent future tort claimants, which led to litigation over the appointment of the Legal Representative, see In re Johns-Manville Corp.,
To their credit, Manville and the Legal Representative finally came to terms in August of 1985, formulating a plan that would earmark billions of dollars for payment to present and future asbestosis victims as well as to others damaged by the asbestos products that Manville once manufactured and sold. They have now received the blessing of the Asbestos Health Committee and apparently of the other creditor committees. Having reconciled their differences, however, they encountered opposition from the Equity Committee immediately following their breakthrough, on the eve of their submission of the plan to the bankruptcy court for confirmation. Under protest, the Equity Committee had been cut out of the negotiations that led to their plan, and if the product of Manville's new understanding with the tort claimants and other creditors is confirmed, equity may be diluted by 90% or more. In re Johns-Manville Corp.,
Manville countered with the instant action. At Manville's behest, the bankruptcy court issued an injunction prohibiting the Equity Committee from pursuing the Delaware action on the ground that the holding of a shareholders' meeting would obstruct Manville's reorganization. Denying the Equity Committee's motion for summary judgment, the bankruptcy court granted summary judgment to Manville sua sponte. In re Johns-Manville Corp.,
Jurisdiction
We turn first to the matter of the bankruptcy court's jurisdiction to issue the injunction. Injunctions are authorized under 11 U.S.C. Sec. 105(a) (1982), which empowers the bankruptcy court to issue any order necessary or appropriate to carry out the provisions of the Code, including orders restraining actions pending elsewhere. See In re Davis,
The bankruptcy court relied for jurisdiction on section 157(b)(2)(A), finding that the request for an injunction in this case was a "core" proceeding, encompassing "[m]atters concerning the administration of the estate." In re Johns-Manville Corp.,
The Injunction and the Grant of Summary Judgment
Turning, then, to the decision to enjoin, we first encounter the well-settled rule that the right to compel a shareholders' meeting for the purpose of electing a new board subsists during reorganization proceedings. See In re Bush Terminal Co.,
An examination of both lower court decisions will clarify the analysis that follows. The bankruptcy court found that "any shareholder meeting and ensuing proxy fight has the potential to derail the entire Manville reorganization with devastating consequences or at least to delay or halt plan negotiations." In re Johns-Manville Corp.,
Taking the district court's latter point first, we cannot agree that the Equity Committee's professed desire to arrogate more bargaining power in the negotiation of a plan--in contrast to some secret desire to destroy all prospects for reorganization--may in itself constitute clear abuse. The law of this circuit directs that the shareholders' natural wish to participate in this matter of corporate governance be respected. In In re Bush Terminal Co.,
[T]he debtor is given the right to be heard on all questions. Obviously, the stockholders should have the right to be adequately represented in the conduct of the debtor's affairs, especially in such an important matter as the reorganization of the debtor. Such representation can be obtained only by having as directors persons of their choice.... [T]he debtor is given the power to propose a plan of reorganization. No reason is advanced why stockholders, if they feel that the present board of directors is not acting in their interest, or has caused an unsatisfactory plan to be filed on behalf of the debtor, should not cause a new board to be elected which will act in conformance with the stockholders' wishes.
Id. at 664.
The court in In re Bush Terminal Co. thus clearly intended to protect the right of stockholders to be heard in negotiations leading to a rehabilitation plan. As the court concluded, "If the right of stockholders to elect a board of directors should not be carefully guarded and protected, the statute giving the debtor a right to be heard or to propose a plan of reorganization could not truly be exercised, for the board of directors is the representative of the stockholders." Id. at 665. Under this analysis, the shareholders' mere intention to exercise bargaining power--whether by actually replacing the directors or by "bargaining away" their chip without replacing the board, as the district court suggests they may have wished to do--cannot without more constitute clear abuse. Unless the Equity Committee were to bargain in bad faith--e.g., to demonstrate a willingness to risk rehabilitation altogether in order to win a larger share for equity--its desire to negotiate for a larger share is protected. Moreover, if rehabilitation is placed at risk as a result of the other committees' intransigent unwillingness to negotiate with the Equity Committee, as opposed to their real inability, within some reasonable amount of time, to formulate any confirmable plan more satisfactory to equity, the Equity Committee should not alone bear the consequences of a stalemate by being deemed guilty of clear abuse.6
In re Lionel Corp.,
Finally, we reject appellees' suggestion that the availability to the Equity Committee of other means with which to oppose Manville's plan robs the Equity Committee of its chosen means. It is true that the Equity Committee could have sought the appointment of a trustee8 to displace Manville as the sole author of proposed plans and that it may later object to the confirmation of any plan Manville submits to the bankruptcy court. But those correctives provide only imperfect substitutes for a voice in the original formulation of a plan. More to the present point, perhaps, those avenues to shareholder satisfaction cannot be said to be exclusive in light of this circuit's legitimation of the shareholders' right to elect new directors for the frank purpose of advancing a plan they prefer.
In this connection, we must reject Manville's argument that a full inquiry into "clear abuse" would duplicate the confirmation proceedings that will follow submission of its present plan or any other. Unlike the analysis to determine clear abuse, the object of the confirmation proceedings will be to weigh Manville's proposed plan against other possible plans, taking into account the interests of impaired classes that object to Manville's proposals. In contrast, the determination whether the Equity Committee is guilty of clear abuse turns on whether rehabilitation will be seriously threatened, rather than merely delayed, if Manville's present plan is not submitted for confirmation now. See In re Bush Terminal Co.,
We now reach the district court's alternative ground for affirming the grant of summary judgment. The bankruptcy court's finding that the proposed stockholders' meeting might jeopardize the reorganization process, "or at least ... delay or halt plan negotiations,"
In In re Potter Instrument Co.,
It thus appears that the Equity Committee might distinguish itself from the shareholder in In re Potter Instrument Co., given the opportunity for an evidentiary hearing. The Equity Committee persuasively calls into question whether the bankruptcy court had any basis for concluding here that an election would jeopardize the reorganization process, particularly since the bankruptcy court's articulated basis appears to have been colored by an unsubstantiated suspicion that the Equity Committee affirmatively wished to jeopardize reorganization.9 Perhaps Potter was willing to embark on a suicide mission, "sounding the 'death knell' to ... himself" along with the debtor. But as the Equity Committee argues, the lower courts in this case pointed to no evidence to support any finding that it wished to "torpedo" the reorganization, which the Equity Committee contends would be an irrational goal from its perspective.
The bankruptcy court stated that it relied on "the cumulative record in this case" to distinguish it from In re Lionel Corp.,
The evidence contained in the Parker affidavit, consisting principally of the conclusion quoted above, is insufficient to support the determination of clear abuse underlying the grant of summary judgment. See Rule 56(e), Fed.R.Civ.P. While we agree with the district court that it was proper for the bankruptcy court to consider the record as a whole in determining whether summary judgment was appropriate, see Rule 56(c), Fed.R.Civ.P., without being told which portions of the bankruptcy court's accumulated knowledge it relied on for decision, we cannot agree that no material issues of fact remain to be determined.10
Moreover, as the Equity Committee argues, a finding of clear abuse must be supplemented by a finding of irreparable injury before an injunction may issue. The bankruptcy court seemed to assume that the two inquiries coalesce; after finding clear abuse, it concluded without further analysis that an injunction was necessary to prevent irreparable harm to the reorganization. In re Johns-Manville Corp.,
Although the inquiries into clear abuse and irreparable injury will likely yield the same result in most if not all cases, an articulated analysis of irreparable injury would achieve a better focus and assist the reviewing court. In this connection, it is worth noting that In re Potter Instrument Co., the only authority for a finding of clear abuse in circumstances resembling Manville's, did not deal with injunctive relief at all. There the court merely declined to direct a shareholders' meeting. In any event, on this record any harm to the reorganization was speculative enough that the irreparable injury requirement was not satisfied.
We address finally the problem posed by the litigants' concessions below. The bankruptcy court found no issue of fact in dispute. The district court affirmed the bankruptcy court's sua sponte award of summary judgment to Manville because "there was nothing to be gained in this instance from a full evidentiary hearing." In re Johns-Manville Corp.,
The Equity Committee denies having conceded the conclusions in the Parker affidavit,11 and Manville itself points out that the Equity Committee argued to the district court that the affidavit was incompetent. Moreover, any concession to facts set forth in the Parker affidavit would hardly have authorized the bankruptcy court to base its decision on a fact that the Equity Committee did not admit; it would not have authorized the court to conclude that jeopardy to reorganization was more likely to occur in part because the Equity Committee, which confessed only to its desire to thwart particular proposals, was motivated to undermine all rehabilitation plans. Since the Equity Committee did not concede any such motivation, the court should not have rendered summary judgment upon the strength of a finding thereof. Nor do we believe that the Equity Committee can be deemed to have conceded the entire content of the bankruptcy court's "accumulated knowledge." An evidentiary hearing was necessary before granting summary judgment on the basis of either of those grounds. Articulation of the grounds for decision should then have followed. See In re Teltronics Services, Inc.,
On the record before us we cannot say that either side is entitled to summary judgment in its favor. There may be evidence known to the bankruptcy court but unarticulated in its opinion to support the result it reached. Manville's burden on remand, however, will be altered in accordance with this opinion.
Conclusion
Whether the Equity Committee's call for a shareholders' meeting constitutes clear abuse and whether such a meeting would cause irreparable harm to Manville's reorganization are triable issues of fact. The summary judgment award to Manville is therefore reversed. On remand, the court should undertake a more elaborate inquiry into clear abuse and irreparable harm. Rather than focusing on the Equity Committee's conceded desire to enhance its bargaining position, the court should analyze the real risks to rehabilitation posed by permitting the Equity Committee to call a meeting of shareholders for the purpose of compelling reconsideration of Manville's presently proposed plan. We emphasize, however, that given its greater knowledge about this complex and perhaps fragile reorganization, the bankruptcy court may exercise its legitimate injunctive powers to control the future course of rehabilitation pursuant to appropriate legal standards and evidentiary showings.
OAKES, Circuit Judge (dissenting):
I am unclear what the majority intends to accomplish by the reversal and remand, except to compel bankruptcy judges and district courts to make more precise findings in support of their orders. Ordinarily I would support such a limited remand, especially where, as here, the bankruptcy court's reasoning required supplementation by the district court. But here confirmation of a plan in one of the most complicated and difficult bankruptcy reorganizations in history is well under way, and I fear that the court's opinion will not only unnecessarily duplicate, but it will, if not derail, at least delay the confirmation proceedings.
After all, the proposed plan had been in heated, tricky, combative negotiation for some three years prior to the Equity Committee's actions. If the plan is indeed biased, the Equity Committee has ample opportunity to oppose confirmation and to prove discrimination or unfairness to it. See 11 U.S.C. Sec. 1129(b) (1982 & Supp. III 1985).
Under In re Potter Instrument Co.,
But there is an entirely different reason that argues for affirmance. The bankruptcy judge has been living with this reorganization for a long time. He is fully sensitive to the enormity of the problems imposed by billions of dollars of future claims, as well as by billions of dollars of present claims for personal injury, death, and property damage--claims on a scale never before to hit the courts--as well as claims for punitive damages that, given those that have so far been imposed in the tiny fraction of cases that have been decided, are staggering to say the least. I repeat, no more complex reorganization has ever come before any bankruptcy court, and I include the railroad reorganization of recent past as well as of yore. I would here, as seldom elsewhere, defer to the bankruptcy court's discretion.
Yet a third reason calls for no further delay in the name of abstract stockholders' rights. There are innocent injured people, some of whom are survivors of deceased persons, whose recoveries have already been unduly delayed by the reorganization proceedings. Further delay will in many instances be unconscionable.
I would affirm outright and leave the Equity Committee to its usual remedy of objecting to the plan and its fairness in the confirmation proceeding.
Accordingly, I respectfully dissent.
Notes
Section 1102(a)(2) of the Bankruptcy Code provides: "On request of a party in interest, the court may order the appointment of additional committees of creditors or of equity security holders if necessary to assure adequate representation of creditors or of equity security holders. The court shall appoint any such committee." 11 U.S.C. Sec. 1102(a)(2) (1982)
Although it has standing to be heard in the first instance, the Securities and Exchange Commission does not have standing to appeal. 11 U.S.C. Sec. 1109(a) (1982). It may, however, participate in an appeal taken by a party in interest. H.R.Rep. No. 595, 95th Cong., 1st Sess. 404, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5963, 6360
With certain exceptions, impairment of claims or interests, defined at 11 U.S.C. Sec. 1124 (1982 & Supp. II 1984), occurs when a plan alters the legal, equitable, or contractual rights of the claim or interest holder
Del.Code Ann. tit. 8, Sec. 211(c) (1983) provides that upon "a failure to hold the annual meeting ... for a period of 13 months ... after its last annual meeting, the Court of Chancery may summarily order a meeting to be held upon the application of any stockholder or director."
Section 157 provides in pertinent part:
(a) Each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district.
(b)(1) Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 of this title.
(2) Core proceedings include, but are not limited to--
(A) matters concerning the administration of the estate;
* * *
(c)(1) A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.
28 U.S.C. Sec. 157 (Supp. II 1984).
We note that if Manville were determined to be insolvent, so that the shareholders lacked equity in the corporation, denial of the right to call a meeting would likely be proper, because the shareholders would no longer be real parties in interest. Although the bankruptcy court discussed the possibility of Manville's insolvency in connection with its treatment of the Equity Committee's request for retention of special counsel and reimbursement of expenses, see In re Johns-Manville Corp.,
We do not suggest, of course, that an equity committee's delay in calling a shareholders' meeting may never contribute to a finding of clear abuse. As the Securities and Exchange Commission pointed out in its brief, an attempt to call a shareholders' meeting after a plan has been submitted to the bankruptcy court and after confirmation hearings have begun would usually be more disruptive to the proceedings than an earlier attempt would be. Such an attempt might also indicate bad faith and a willingness to risk jeopardy to rehabilitation. On the other hand, a rule that required a call before dissatisfaction had crystallized would only encourage preemptive efforts that might otherwise be avoided by negotiation. In this case, the Equity Committee apparently acted promptly upon learning of Manville's proposed plan and is certainly not accountable for any movement toward confirmation that may have occurred thereafter over its objections
A committee ... may move for the appointment of a trustee where current management is not, in the opinion of the committee, negotiating the terms of a plan in good faith. The committee may conclude that the positions taken by the debtor's control group in connection with plan negotiations are not in the best interests of creditors or equity interests. Under such circumstances, the committee may request the appointment of a trustee in order to terminate the control status of current management and to enable the committee to file a plan of reorganization under section 1121(c)(1)
Collier on Bankruptcy p 1103.07, at 1103-27 to 1103-28 (15th ed. 1986)
In reviewing the bankruptcy court's decision, the district court characterized its findings as follows:
[T]he dim prospects for a successful reorganization following the election of a new board led the bankruptcy court to question the Equity Committee's motivation in seeking a new election. By its own admission, the Equity Committee brought the Delaware action in order to derail the proposed plan. Either the appellants seek to destroy any prospect for a successful reorganization, or they wish to use the threat of a new board as a lever vis-a-vis other interested constituencies and vis-a-vis the current Manville board. Neither the interest in torpedoing the reorganization nor in acquiring a chip to be bargained away are legitimate. Judge Lifland, who was well aware of the dynamics of the Manville bankruptcy, had ample evidence from which to conclude that by either attempting to destroy the prospects for a successful reorganization or by merely attempting to strengthen its bargaining position without changing the current board, the Equity Committee was acting in a clearly abusive manner.
B.R. at 852 (footnotes omitted). The bankruptcy court decision itself did not define the Equity Committee's supposed ill motives quite so clearly. At one point, however, the bankruptcy court observed that "[s]ection 105(a) contemplates the court's use of injunctive relief in precisely those instances where parties are attempting to obstruct the reorganization."
In Manville's view, the bankruptcy court did review the facts that led it to find "clear abuse," adverting in its opinion to the facts that Manville had been in bankruptcy for three years without any resolution,
Indeed, at oral argument before the bankruptcy court, the Equity Committee argued that the Parker affidavit is:
unsupported by facts, unsupported by exhibits, without any details is simply a bald conclusory statement which peers into the future and by its nature is basically conjectural, speculative and does not give rise to the level of an evidentiary showing, that the things he [Parker] says might happen will happen or could happen.
Record Item 20 at 13.