Case Information
*1 U NITED S TATES D ISTRICT C OURT F OR T HE N ORTHERN D ISTRICT OF I LLINOIS E ASTERN D IVISION
I N RE W OODLAWN C OMMUNITY
D EVELOPMENT C ORP .,
Debtor.
No. 19 CV 1605 W OODLAWN C OMMUNITY D EVELOPMENT
C ORP ., Judge Manish S. Shah
Aрpellant, Appeal from the United States Bankruptcy Court for the v. Northern District of Illinois, No. 18-29862.
O FFICIAL C OMMITTEE OF U NSECURED
C REDITORS ,
Appellee.
M EMORANDUM O PINION AND O RDER
For almost 50 years, Dr. Leon Finney ran the Woodlawn Community Development Corporation, a nonprofit organization that provided affordable housing and advocated for social justice in the Woodlawn neighborhood on the south side of Chicago. The organization had a board of directors and senior-level managers in place, but, in practice, Finney singlehandedly ran the organization with nearly unlimited discretion. Among his decisions with dire consequences for the organization, Finney diverted over a million dollars in employee payroll taxes into Woodlawn’s operating account. The IRS tax lien that followed then caused Woodlawn to file a Chapter 11 bankruptcy petition. Woodlawn’s unsecured creditors moved the bankruptcy court to appoint a trustee under 11 U.S.C. § 1104(a) to take over management of the debtor’s estate. The unsecured creditors’ committee, the U.S. *2 Trustee, and the Chicago Hоusing Authority, Woodlawn’s largest client, all supported appointment of a trustee.
After three hearings, the bankruptcy judge granted the motion. She found that Finney’s conduct amounted to gross mismanagement, fraud, and self-dealing. See 11 U.S.C. § 1104(a)(1). And although Woodlawn had hired a member of its board of directors to be its new CEO, the judge found that, overall, Woodlawn’s management had continued largely unchanged. A trustee would be in the creditors’ interest, according to the judge, because the creditors had lost confidence in Woodlawn’s management. See 11 U.S.C. § 1104(a)(2). Woodlawn appeals the order appointing a trustee, insisting that the court insufficiently weighed Woodlawn’s change in management. The bankruptcy judge did not abuse her discretion in appointing a trustee, and the order is affirmed.
I. Legal Standards
A reviewing court assesses the bankruptcy court’s factual findings for clear
error and its legal conclusions de novo.
In re Marcus-Rehtmeyer
,
II. Jurisdiction
A federal district court has jurisdiction to hear “appeals from final orders of a
bankruptcy court.”
In re Sobczak-Slomczewski
,
Woodlawn asserts that the appointment of a Chapter 11 trustee is a final order, appealable as of right. The U.S. Trustee argues that the appointment of a Chapter 11 trustee is an interlocutory order, so this court has only discretionary jurisdiction, and urges dismissal of the appeal. [1] Woodlawn does not respond to the Trustee’s arguments about discretionary jurisdiction.
In the “strict sense,” a Chapter 11 bankruptcy is not final “until a plan of
reorganization is confirmed.”
In re UAL Corp.
,
*4
The Seventh Circuit, without specific analysis, included appointment of a
trustee in a list of final, appealable orders from a bankruptcy court.
Matter of Wade
,
991 F.2d 402, 406 (7th Cir. 1993) (listing appealable bankruptcy court orders,
including “appointments of trustees”). Other circuits find that such an order is final
because, once a bankruptcy court appoints a trustee, there is “nothing more for the
bankruptcy court to do.”
Ritchie Special Credit Investments, Ltd. v. U.S. Tr.
, 620 F.3d
847, 852 (8th Cir. 2010). It makes little sense to delay reviewing the appointment of
a trustee (or denying one) until the bankruptcy case is over. If a court on appeal were
to reverse the appointment of a trustee, that decision could “jettison years of
bankruptcy infighting, compromise and final determinations” only to “have the
proceedings begin again from scratch.”
In re Marvel Entm’t Grp., Inc.
,
I agree. The bankruptcy court’s order here conclusively resolved a discrete
dispute—whether Woodlawn’s internal management or an independent trustee
would oversee Woodlawn’s reorganization. That decision had significant
consequences for Woodlawn and the creditors going forward.
Cf. Schaumburg Bank
,
The U.S. Trustee relies on
Matter of Cash Currency Exch., Inc.
,
Because the bankruptcy court’s order resolved a discrete dispute, the order was final and appealable as of right.
III. Background
In 1960, 100 neighborhood associations, religious organizations, and civic groups created the Woodlawn Organization to revitalize the Woodlawn neighborhood on the south side of Chicago. [21-1] at 11. [2] In 1972, Woodlawn Community Development Corporation (Woodlawn) formed to manage real estate development for the Woodlawn Organization. [21-1] at 11. Woodlawn later developed ten construction projects; by 2018, Woodlawn managed 4,800 public housing apartments across 14 properties. [21-1] at 11. Woodlawn owned some of the properties outright, and managed others that were owned by the Chicago Housing Authority, Woodlawn’s largest client. [21-1] at 437, 457, 473. Until October 2018, Dr. Leon Finney was Woodlawn’s President and CEO. [21-1] at 10.
Woodlawn owned a building at 1500 East 63rd Street. [21-1] at 142, 441, 460. A real estate company that Finney owned, Lincoln South Central Real Estate Corporation, managed that property. [121-1] at 142, 157, 186, 441, 460. Lincoln South collected rent from the tenants, and was supposed to pay that rent to Woodlawn. [121- 1] at 157, 186. For about seven years, Lincoln South never paid Woodlawn any rent that it collected from that property. [21-1] at 143, 186, 233, 460, 468. [3] *7 Sometime around the beginning of 2017, Woodlawn changed payroll processors. [21-1] at 84, 268, 459. Woodlawn’s CFO, Amy Mohammad, began handling payroll taxes internally. [21-1] at 84, 89. Finney told the new processor that Woodlawn would pay its employee payroll taxes itself. [21-1] at 135, 149, 185, 219, 459. Instead of paying employee payroll taxes, Finney moved the money from Woodlawn’s payroll account into its operating account, and took $150,000 of that money to prevent foreclosure on one of Woodlawn’s properties. [8] at 67–69, 220, 224, 268–69, 289, 457, 459. Woodlawn failed to pay payroll taxes for the second and fourth quarters of 2017 and the first quarter of 2018, and the IRS filed federal tax liens in the amount of $1.5 million to $1.8 million. [21-1] at 13, 185, 457. [4]
In October 2018, Finney told Woodlawn’s board of directors that the organization had to file for bankruptcy, and that he was ill and could no longer serve as CEO. [21-1] at 307. On October 24, 2018, Woodlawn filed a voluntary petition for relief under Chapter 11 of the bankruptcy code. [21-1] at 3. [5] Shortly after filing the petition for bankruptcy, Finney fell ill and began an extended medical leave. [21-1] at 200, 208, 298.
*8 At the same time, Woodlawn hired Dr. Clarence Nixon, a longtime member of Woodlawn’s board of directors, to serve as a consultant during the bankruptcy case. [21-1] at 19, 30, 186, 248, 461. A few days after filing the Chapter 11 petition, Woodlawn moved for authorization to use cash collateral, and asked the court to authorize paying Nixon $35,000 a month as a consulting fee. [21-1] at 19, 30, 186, 248. The Official Unsecured Creditors’ Committee and the U.S. Trustee both objected to that consulting fee. [21-1] at 32, 186, 275, 461–22. The judge granted Woodlawn’s motion to use cash collateral, but stated that the consulting fee to Nixon “shall not be paid until further order of the Court.” [21-1] at 32. Woodlawn removed Nixon from the cash collateral order, but paid him $35,000 anyway. [121-1] at 187, 461. Woodlawn characterized the payment as an initial bonus fee instead of a consulting fee. [21-1] at 191–92, 298. In late November, Woodlawn hired Nixon as interim CEO and president, with his employment dating back to October 24, the date Woodlawn filed for bankruptcy. [21-1] at 73, 76, 191, 308. Nixon initially refused to return the $35,000, but, after the Committee threatened to move to appoint a trustee, Nixon returned the money at the еnd of January. [21-1] at 187. Finney, meanwhile, remained on sick leave through December. [21-1] at 146, 206, 298, 311–12. Woodlawn paid Finney $8,812 in December 2018, even though the cash collateral order did not authorize any payments to Finney. [21-1] at 187, 298.
Nixon replaced Finney as CEO, but Woodlawn’s leadership otherwise remained the same. [21-1] at 465. As of February 2019, Leon Jackson was still the chairman of the board of directors. [21-1] at 209, 339, 467. Finney’s daughter, Kristin *9 Finney-Cook, had been on the board since 2002 and remained a director. [21-1] at 210, 467. Two other directors stayed on the board. [21-1] at 209. The acting controller, Raymond Smith, had been in that role for about 10 years. [21-1] at 212, 468. Both Smith and Woodlawn’s in-house counsel, Georgette Reynolds, remained in the same positions after Nixon replaced Finney. [21-1] at 468. Finney continued participating in Woodlawn’s management as a volunteer. [21-1] at 75, 77, 246, 309, 465. [6]
As of November 2018, Nixon had not taken any steps to collect rent from Lincoln South. [21-1] at 143. Sometime before February 2019, Nixon requested an accounting from Lincoln South, but never made any formal demand for unpaid rent. [21-1] аt 311, 328–29, 465. According to Nixon, Finney had committed to paying the unpaid rent, but Nixon did not know whether Finney had put that promise in writing, or how much rent Lincoln South owed. [21-1] at 329.
On February 5, 2019, the Committee moved to appoint a Chapter 11 trustee under 11 U.S.C. § 1104(a). [21-1] at 184–85. The statute provides that, at any time after the commencement of a case, a bankruptcy court shall order the appointment of a trustee either “for cause,” “including fraud, dishonesty, incompetence, or gross mismanagement” by “current management,” 11 U.S.C. § 1104(a)(1), or if the appointment of a trustee is in the “interests of creditors.” Id. § 1104(a)(2). The Committee argued that Woodlawn had engaged in gross mismanagement and “potential fraud, dishonesty and incompetence.” [21-1] at 185. The Committee listed *10 several examples, including the unpaid payroll taxes; the $35,000 payment to Nixon in violation of the cash collateral order; failure to collect rent from Lincoln South; and failure to pay insurance premiums. [21-1] at 185–86.
A week later, the parties appeared before the bankruptcy judgе for a hearing on the Committee’s motion. [21-1] at 256. [7] At the hearing, counsel for the CHA noted that the agency supported the appointment of a trustee, did not support “any application to employ Mr. Nixon,” and had “lost all faith” in Woodlawn’s management. [21-1] at 273–74. The judge said she was “very seriously thinking” about granting the motion for appointment of a trustee, and was surprised that the Committee hadn’t filed its motion earlier. [21-1] at 258, 272, 278, 289.
Woodlawn requested an evidentiary hearing. [21-1] at 258, 269. The judge noted that Woodlawn had had “plenty of time” to anticipate a motion for a trustee, and rejected the idea that an evidentiary hearing was necessary, because the facts “jump[ed] off the page.” [21-1] at 260. Nevertheless, she said that if Woodlawn convinced her that there were any disputed facts that warranted exploration at an evidentiary hearing, she would consider holding one; she continued the hearing for a week and told Woodlawn’s counsel to file a written response to the Committee’s motion. [21-1] at 278–79, 291.
*11 In its written submission, Woodlawn аrgued that appointment of a trustee was not justified because new management had taken over the organization, independent from Finney’s mismanagement. [21-1] at 294–304. It also promised to file a reorganization plan in another week, which provided for a $2.8 million infusion that Woodlawn would use to pay its creditors. Woodlawn argued that it was in the interests of the creditors to allow its reorganization plan, rather than appoint a trustee, which, it argued, would lead to liquidation. [21-1] at 303.
At the next hearing, the judge said she was still considering holding an evidentiary hearing based on Woodlawn’s written submission. [21-1] at 368, 372–73. She asked Woodlawn’s counsel where the money for the proposed reorganization was coming from, and counsel explained that the cash infusion would come from the sale of two properties by other nonprofit organizations that Finney managed. [21-1] at 325–26, 370. The judge continued the hearing for another week, and directed counsel for the Committee to respond to Woodlawn’s written submission. [21-1] at 372. On February 21, 2019, Woodlawn filed its reorgаnization plan. [21-1] at 381–416.
On February 27, 2019, the judge orally granted the motion to appoint a trustee. [21-1] at 451. Although counsel for Woodlawn again asked for an evidentiary hearing, the judge determined that no hearing was warranted since there were no disputed facts. [21-1] at 431–32, 452. The judge found it “abundantly clear” that there was “no reason for putting anybody on the stand.” [21-1] at 433.
The judge determined that the Committee needed to prove cause for a trustee
only by a preponderance of the evidence, not clear and convincing evidence. [21-1] at
*12
454–55. Although some bankruptcy courts required the movant to make the case for
a trustee by clear and convincing evidence, the bankruptcy judge agreed with the
Eighth Circuit Bankruptcy Appellate Panel that a preponderance standard was
correct under Supreme Court precedent. [8] at 64–65 (first citing
In re Keeley vs.
Grabanski Land P’ship
,
The judge found that a trustee was justified under both 11 U.S.C. § 1104(a)(1)—for fraud, dishonesty, incompetence, or gross management—and (a)(2)—because it was in the interests of the creditors. [21-1] at 452, 471–72. Under § 1104(a)(1), she cited Finney’s diversion of payroll taxes, which she called “at least malfeasance,” as well as “fraud,” “dishonesty,” and “gross mismanagement.” [21-1] at 457, 460, 471. [8] The judge likened the move to “theft of the employees’ wages.” [21-1] at 458. Also, she highlighted that Finney had lied when he said that he had been surprised by the unpaid taxes, because he later admitted that he had directed the misappropriation of the payroll tax money. [21-1] at 458. She also cited Woodlawn’s failure to collect rent from Lincoln South, which she called an “obvious case of self- dealing.” [21-1] at 460–61, 471. She noted that Woodlawn had failed to “prioritize and maintain insurance,” and that the $35,000 payment to Nixon, in violation of the *13 court’s cash collateral order, was “at a minimum, post-petition gross incompetence or mismanagement.” [21-1] at 462, 471.
Woodlawn largely did not contest the judge’s factual findings, but instead argued that any mismanagement occurred under Finney’s leadership. [21-1] at 463. Since Nixon had reрlaced Finney as CEO and president, Woodlawn argued, it was under new management and a trustee was improper. [21-2] at 463. The judge disagreed. She found that current management was “nowhere near free from the taint of prior management,” because the current board of directors was “the exact same” and management had “continued, almost seamlessly, into the present moment.” [21- 1] at 435, 464, 467, 470. And, the judge noted, the in-house counsel and controller either knew or should have known about the unpaid rent and payroll taxes. [21-1] at 469. Management decisions implicated more than one person, and Woodlawn’s collective management team had “permitted all the instances of fraud, dishonesty, mismanagement, or incompetence.” [21-1] at 469–70.
The judge also rejected Woodlawn’s argument that Nixon’s appointment purged the taint of Finney’s misconduct, since Nixon had been on the board of directors while Finney was mismanaging the organization. [21-1] at 464–65. Further, Nixon had not taken adequate steps to collect any rent that Linсoln South owed, or canceled the lease with that group. [21-1] at 464. Thus, the judge found that Nixon was “unwilling to take a hard position” against Finney, who had been keeping “significant amounts of money owed” to Woodlawn. [21-1] at 465–67. The judge also found it “distressing” that Finney remained involved with Woodlawn as a volunteer; *14 he still physically visited Woodlawn’s offices and “still influenc[ed Woodlawn’s] affairs” despite “his admitted malfeasance.” [21-1] at 465, 467. Finally, the judge rejected Woodlawn’s argument about its new management because Woodlawn lacked internal controls and management tools to prevent such misconduct from happening—the judge found that such controls had not been in place when Finney was CEO, and Nixon had not instituted sufficient safeguards since taking over. [21- 1] at 470–71.
The judge also relied on § 1104(a)(2). [21-1] at 472–73. She asked the creditors present whether “the creditors are all in favor of this,” and observed that all of the creditors’ attorneys were “shaking their heads yes.” [21-1] at 436, 447. In other words, “the only party opposing” appointment of a trustee was Woodlawn itsеlf. [21-1] at 436, 447. All of the creditors who had participated in the case supported the appointment of a trustee, including the Committee and the CHA—Woodlawn’s principal client. [21-1] at 473. The judge stated that she had considered Woodlawn’s reorganization plan, but was not persuaded, and neither were the creditors, that Woodlawn’s reorganization plan had “any real prospect for acceptance or success.” [21-1] at 473–74.
Finally, the judge noted that she did not “like to appoint a trustee,” and had never done so with a nonprofit organization before. [21-1] at 427, 434–35. She acknowledged that Woodlawn played a “role in the community” and had done “plenty of good.” [21-1] at 433. The judge thus noted that it was “certainly not [her] goal” to dismantle Woodlawn or fire employees. [21-1] at 433–34, 436. Rather, her goal was *15 to appoint an independent third party to remedy the ongoing problems, improve the organization’s functioning, and move things forward. [21-1] at 428, 433–34, 474. She hoped that appointing a trustee would have a “positive impact” on Woodlawn. [21-1] at 451.
IV. Analysis
Woodlawn says that the bankruptcy judge erred by failing to conduct an evidentiary hearing before appointing the trustee. And, it argues, she abused her discretion in appointing a trustee both for cause and in the interests of the creditors, because Woodlawn was under new management and had offered the court a reorganization plan. The U.S. Trustee and the Committee argue that the bankruptcy judge appropriately exercised her discretion.
A. Standard of Proof
The parties renew their arguments about whether a movant under 11 U.S.C.
§ 1104 must show the need for a trustee by clear and convincing evidence, as
Woodlawn argues, or a preponderance of the evidence, as the U.S. Trustee argues.
The parties agree that neither the Supreme Court nor the Seventh Circuit has
addressed the issue in this context. Courts are divided on this question.
See In re
López–Muñoz
,
Generally, unless the governing statute specifies a higher burden, or the
Constitution demands a higher burden “because of the nature of the individual
interests at stake,” proof by a preponderance of the evidence is the default standard
*16
in civil cases.
Ramirez v. T&H Lemont, Inc.
,
Courts recognize exceptions to the preponderance standard only when the
government “seeks to take unusual coercive action.”
Ramirez
, 845 F.3d at 778
(quoting
Price Waterhouse v. Hopkins
,
Here, the statute does not specify what standard of proof a bankruptcy court
should apply.
See
11 U.S.C. § 1104. Thus, some courts have relied on
Grogan
and
Huddleston
and held that the movant must satisfy the preponderance of the evidence
standard when advocating for appointment of a Chapter 11 trustee.
See In re Keeley
*17
& Grabanski Land P’ship
,
Other courts require clear and convincing evidence.
See In re Bayou Grp.
,
LLC
,
Courts that have endorsed the higher standard reason that appointing a
trustee under § 1104(a) is an “extraordinary” remedy.
In re Bayou Grp.,
564 F.3d at
546 (quoting 7 Collier on Bankruptcy ¶ 1104.02(2)(a));
In re Sharon Steel Corp.
, 871
F.2d 1217, 1225 (3d Cir. 1989) (“It is settled that appointment of a trustee should be
the exception, rather than the rule.”). That is because typically, the debtor is most
familiar with the organization, and is best suited to manage the company’s
reorganization.
In re Marvel
, 140 F.3d at 471. Courts have thus acknowledged a
“strong presumption” that the debtor is to remain in possession.
Id.
;
In re LHC,
497
B.R. at 291. Because of that presumption, “the standard for § 1104 is very high.”
In
re Smart World Techs., LLC
,
With respect, I disagree. Preponderance of the evidence is the correct standard. The statute does not specify the standard of proof, and there is no reason to deviate from the default standard here. Perhaps a court’s appointment of a trustee is a form of government coercion, but once a debtor seeks voluntary bankruptcy protection, it subjects itself to the full panoply of available statutory procedures. No one’s individual rights are at stake. The only interest at issue is the management of a company or a nonprofit organization—not rights akin to those at stake in deportation, involuntary commitment, or parental termination proceedings.
Woodlawn argues that because appointing a trustee is an extraordinary
remedy, the standard of proof should be higher. But whether a remedy is unusual or
irregular is a separate question from whether it implicates important individual
rights. What’s more, the presumption that the debtоr should remain in possession is
not grounded in the statute; it is judicially created. And the courts that rely on the
*19
presumption use it as a synonym for clear and convincing evidence. But if those two
things are same, then one does not follow from the other. In any event, even if there
were a traditional statutory presumption here, the existence of a presumption does
not mandate a higher standard of proof. Lots of important presumptions fall away
when met with a preponderance of contrary evidence.
See, e.g.
,
Milanouic v. Holder
,
Woodlawn’s reliance on
Microsoft Corp. v. I4I Ltd. P’ship
,
Because the Supreme Court in
Microsoft
resolved the standard-of-proof
question based on the statutory text, it had no need to consult
Grogan
and
Huddleston
. Courts need only consider what standard of proof to apply if the statute
is silent. The
Microsoft
Court found that, as a matter of statutory interpretation,
Congress intended a party arguing patent invalidity to demonstrаte it by clear and
convincing evidence. Here, by contrast, Woodlawn does not base its argument for a
higher standard of proof in the text of the statute. Woodlawn does not argue that the
presumption that a debtor remains in possession comes from pre-statute common
law, like the presumption of patent validity. Nor, as noted above, is that presumption
codified like the patent-validity statute. The Court’s analysis in
Microsoft
was
cabined to one statute with a specific interpretive backdrop. The statute here does
not specify, or even suggest, an applicable standard of proof.
Microsoft
is inapposite.
See also Fishman Transducers, Inc. v. Paul
,
Ultimately, it doesn’t matter which standard the bankruptcy judge applied, because she found that there was evidence justifying the appointment of a trustee under either standard. But I agree with the bankruptcy judge and the U.S. Trustee that the preponderance standard is the correct onе.
B. The Appointment of a Trustee
Under 11 U.S.C. § 1104(a), at any time after the commencement of a case, the
bankruptcy court shall order the appointment of a trustee either for cause, “including
fraud, dishonesty,
incompetence, or gross mismanagement” by “current
management,” 11 U.S.C. § 1104(a)(1), or if the appointment of a trustee is in the
“interests of creditors.”
Id.
§ 1104(a)(2). Decisions under this section “must be made
on a case-by-case basis.”
In re Sharon Steel
,
1. For Cause
Incompetence, dishonesty, gross mismanagement, and fraud “cover a wide
range of conduct.”
Dalkon Shield Claimants
,
Here, the bankruptcy judge properly exercised her discretion in finding cause to appoint a trustee under 11 U.S.C. § 1104(a). The record supports the conclusion that Woodlawn engaged in gross mismanagement and dishonesty. The judge primarily focused on three instances of misconduct: the unpaid taxes, the unpaid rent *22 from Lincoln South, and Nixon’s consulting fee, which violated the cash collateral order. Any one of those circumstances supported a finding of gross mismanagement, fraud, or dishonesty. For example, Finney engaged in a deliberate scheme to access employee payroll taxes by switching payroll processing companies and telling the new company that Woodlawn would handle payroll taxes internally in order to gain access to that money. He then treated employees’ wages as an all-purpose fund that he could dip into for whatever purpose he saw fit. As the bankruptcy judge found, Finney essentially stole employees’ wages. On top of that, Finney lied when, in the organization’s Chapter 11 petition, he stated that management was surprised by the unpaid tax liabilities—he was the manager who personally directed the diversion of the payroll taxes.
Likewise, for about seven years, Woodlawn did not collect any rent from one of its properties. Putting aside any impropriety in Finney contracting with Lincoln South, his own company, in the first place, the judge reasonably concluded that this was an obvious case of self-dealing. By forgoing collecting rent from Lincoln South, Finney was opting to keep the rent for his other company.
Finally, defying a court order—such as paying Nixon a consulting fee that the
bankruptcy judge explicitly forbade—is cause to appoint a trustee. The court banned
Woodlawn from paying Nixon a consulting fee, and Woodlawn did it anyway. While
Woodlawn protests that Nixon later entered into an employment contract, and
eventually paid the consulting fee back, those later actions do not mitigate the fact
that Woodlawn’s new management defied a court order at the time. Taken together,
*23
these circumstances more thаn support the court’s finding that cause existed for
appointment of a trustee.
See In re North
, 212 Fed. App’x 626, 626–27 (9th Cir. 2006)
(finding debtor’s noncompliance with a bankruptcy court’s order, among other things,
sufficient to support the bankruptcy court’s finding of both cause and interests of the
creditors);
In re Sillerman
,
Woodlawn does not seriously dispute that any of those circumstances constituted cause for appointment of a trustee. But it renews its argument on appeal that the judge erred in finding cause because Finney, the former CEO, was responsible for all of the organization’s misdeeds. It asserts that once Nixon replaced Finney, the new management was independent of Finney’s influence. The bankruptcy judge disagreed, and that factual finding was not clearly erroneous.
To be sure, § 1104(a) focuses on “current manаgement.” But as the bankruptcy court found, Woodlawn’s management remained almost exactly the same under its new CEO. The people with oversight responsibilities who had allowed Finney to mismanage the organization—including Finney’s daughter—stayed in their management roles. Given those circumstances, the bankruptcy judge correctly concluded that new management and old management were essentially the same. That was especially so because Finney remained involved in the organization as a *24 volunteer. And, Woodlawn’s reorganization plan depended entirely on a donation that Finney had pledged to deliver from the sale of properties owned by his other organizations. Had that plan gone forward, Finney would have remained closely tied to Woodlawn. Nor was Nixon an independent party with no ties to Finney—he had been on the board of directors prior to becoming CEO, and was as complicit in Finney’s mismanagement as any other director.
That Nixon was not sufficiently independent of Finney’s influencе became readily apparent in the months following Nixon’s appointment. By February, when Nixon had been CEO for about four months, Nixon had not made any formal demand for the back rent that Lincoln South owed. Although Nixon asserted that Finney had promised to pay it, Nixon did not know if Finney had ever put that promise in writing. And Nixon could not answer how much rent Lincoln South owed to Woodlawn. Considering that Lincoln South had not paid rent for seven years, the judge reasonably interpreted Nixon’s hesitancy as reluctance to take a hard line against Finney. Relying on Finney’s word alone was clearly insufficient, given his history of deception, and Nixon’s fumbling of the rent collection was an example of current management’s incompetence.
Woodlawn does not dispute that the same in-house counsel, controller, and board of directors who ran the organization under Finney remained in place when the judge decided to appoint a trustee. But it takes issue with the judge’s determination that anyone else in the organization knew or should have known about Finney’s misconduct. [17] at 30. That is, the judge found that Reynolds either knew *25 or “should have known” about the unpaid rent from Lincoln South, and that both Reynolds and Smith “should have known about the essentially stealing of the payroll taxes to pay debt.” [21-1] at 469. Woodlawn complains that the judge ignored the fact that Finney “had almost unfettered control over the organization,” so no one else could have been involved. [17] at 30. But that “unfettered control” was exactly what concerned the judge. Contrary to Woodlawn’s assertion, the judge did not determine that, as a factual matter, any other current Woodlawn employee knew what Finney had done. Rather, her conclusion was that people in Smith’s and Reynolds’s positions—high-level management roles—should have known what was happening in their organization. The court’s finding was not error. That only Finney and Mohammad knew about the unpaid taxes does not inspire confidence in current management. Accepting Woodlawn’s premise that senior-level managers were completely unaware of Finney’s wrongdoing and Mohammad’s involvement, implies that Woodlawn’s upper management was so careless or absent that it permitted a CEO and CFO to misappropriate the organization’s funds with no accountability or oversight. Woodlawn’s argument reinforces the court’s conclusion that the continued management under Nixon promised no significant change from the prior administration.
Along those lines, Woodlawn argues that the judge ignored Nixon’s efforts to institute internal controls after becoming CEO. But the judge acknowledged Nixon’s attempts; she just found those efforts insufficient, especially given the historic lack of internal controls and oversight in the organization, which was a “function of *26 current management.” [21-1] at 471. That finding was not error. Absent any overhauls in leadership personnel, instituting internal controls was inadequate to meaningfully separate the old leadership from the new.
Woodlawn also argues that the bankruptcy court erred by not conducting an
evidentiary hearing before appointing a trustеe. It concedes that a full evidentiary
hearing is not required in every case regarding the appointment of a trustee. [17] at
21;
see In re Ionosphere Clubs, Inc.
,
Generally, whether to hold an evidentiary hearing is within the trial court’s
discretion.
Sullivan v. Running Waters Irrigation, Inc.
,
The judge appropriately exercised her discretion in refusing an evidentiary hearing. First, she gave Woodlawn ample opportunity to develop the factual record. She held two hearings before granting the Committee’s motion and, at the first hearing, invited Woodlawn to submit a response in writing to that motion and to include all relevant disputed facts. Thе judge specifically told Woodlawn’s attorney to *27 address whether there was “an issue of fact that matters.” [21-1] at 279. If Woodlawn had convinced the judge that disputed facts warranted exploration at an evidentiary hearing, the judge would have considered holding one. [21-1] at 278–79, 291. At that point, Woodlawn could have submitted affidavits from Jackson, Smith, Reynolds, Finney-Cook, or any other director explaining their independence from Finney. Instead, Woodlawn included only an affidavit from Nixon. Given that Woodlawn had the chance to present disputed facts and did not, it cannot now complain that it was denied an opportunity to develop the record. Absent any factual dispute, the judge properly granted the Committee’s motion without an evidentiary hearing.
Moreover, Woodlawn suffered no harm from the court’s decision to forgo an evidentiary hearing, because the judge relied on an exhaustive factual record in making her decision. That is, the judge reviewed the transcripts of three creditors’ meetings at which different сombinations of Nixon, Finney, Reynolds, and Smith all testified. During those meetings, Woodlawn officials answered questions from lawyers representing the U.S. Trustee, the Committee, the CHA, and two of Woodlawn’s creditors, as well as Woodlawn’s own attorney. The questions covered the unpaid payroll taxes, including who knew what, and when; Woodlawn’s current management, including both salaried employees and the board of directors; the unpaid rent from Lincoln South and what steps Nixon had taken to recoup those funds; and Finney’s ongoing role with the organization, among other things. Together, the three meetings spanned almost 200 transcript pages. See [21-1] at 70– 179, 196–254, 319–46. Woodlawn takes issue with the judge’s reliance on what it calls *28 “sound bites” from those meetings to determine that Nixon’s leadership was tainted by Finney’s misconduct. [17] at 22. But the record belies Woodlawn’s claim that the judge did not adequately review the transcripts. To the contrary, on the day the judge granted the Committee’s motion, she noted that she had received the transcripts of three creditors’ meetings the day bеfore, and had been “feverishly working through to digest all of that.” [21-1] at 426. In other words, the judge made a fully informed decision based on a wide-ranging and thorough factual record.
Woodlawn suggests that an evidentiary hearing would have borne out only what Smith, Reynolds, and Finney already testified to at the creditors’ meetings: that Finney and Mohammad orchestrated withholding the payroll taxes, and no one else knew what Finney was up to. [17] at 18. The judge already had that information, and no further fact finding would have helped Woodlawn’s cause. See Sullivan , 739 F.3d at 359 (upholding denial of an evidentiary hearing where appellants did not identify what “would have been revealed on cross-examination, what questionable evidence there was or what credibility determinations needed to be made”); S. Dobson St. , 125 F.3d at 1086 (same, where court allowed appellant to submit supplemental evidence in writing, and appellant “has not identified any probative evidence which he was precluded from introducing”).
Finally, Woodlawn argues that the judge should have held an evidentiary hearing on Woodlawn’s proposed reorganization plan. But the judge reviewed that plan, questioned counsel for Woodlawn about it, see [21-1] at 369–72, and determined that it would not have been successful, a conclusion that the creditors agreed with. *29 That conclusion was sound. The reorganization plan assumed a continuing relationship with the CHA, which had no interest in working with Nixon going forward. And, the reorganization plan depended on a cash infusion donated by Finney from other organizations he managed, so the judge was rightly “concerned” to learn that “Dr. Finney is around this organization anymore.” [21-1] at 370, 426. Given Finney’s track record, a donation allegedly procured from Finney’s other agencies was hardly a reliable lifeline. Moreover, neither the creditors nor the CHA supported the reorganization plan. Again, Woodlawn does not offer any insight into how an evidentiary hearing on the plan, which Woodlawn submitted to the court in writing, would have alleviated the judge’s concerns about Finney’s involvement. Notably too, any prejudice to Woodlawn was minimal, as appointment of a trustee did not preclude the organization from pursuing its proposed reorganization plan.
The bankruptcy judge did not abuse her discretion in finding cause for appointment of a trustee. [11]
*30 2. Interests of the Creditors
Section 1104(a)(2) is designed to be a “flexible standard” that gives the
bankruptcy court discretion to appoint a trustee “when to do so would serve the
parties’ and estate’s interests.”
In re Marvel Entertm’t
,
Here, the bankruptcy judge did not abuse her discretion in finding that
appointing a trustee was in the interests of the creditors. All of the creditors who
followed the case by appearing at the court’s hearings supported the motion. When
the judge asked who supported appointing a trustee, all of the creditors present
nodded their heads yes. That group included a representative from the Committee,
as well as a representative from a secured creditor. In addition to the creditors, both
the U.S. Trustee and the CHA, Woodlawn’s largest client, supported appointing a
trustee. Given the agreement of everyone except Woodlawn itself, and the unanimous
lack of confidence in Woodlawn’s existing leadership, appointment of a trustee was
justified.
See, e.g.
,
In re Morningstar Marketplace, Ltd
, 544 B.R. at 305–06
(appointing a trustee under § 1104(a)(2) because of, among other things, “creditors’
*31
frustration”);
In re The 1031 Tax Group, LLC
,
Woodlawn argues that the judge did not ascertain how every creditor felt about the Committee’s motion. But there is no requirement that every creditor sign off on the appointment of a trustee. Rather, § 1104(a)(2) gives courts flexibility. Presumably, the creditors who repeatedly showed up to the creditors’ meetings and court hearings werе the most invested. Given that almost a month passed between the Committee filing its motion and the judge appointing a trustee, if any creditor were opposed to the appointment of a trustee, that creditor likely would have made its objection known. While Woodlawn complains that the judge erred by appointing a trustee without polling all of the creditors, it does not suggest that any creditor had an objection. The CHA was not a creditor, but § 1104(a)(2) contemplates the lack of confidence from both creditors and the business community. The agency represented Woodlawn’s biggest business relationship. The CHA’s counsel unequivocally stated that it had lost all “all faith” in Woodlawn’s management, and, in particular, did not support appointing Nixon as CEO. [21-1] at 273–74. In this case, the CHA’s lack of faith in Woodlawn was highly relevant to the business community’s general attitude about appointing a trustee, especially when the agency’s opinion was consistent with the creditors’ view. The court’s finding that appointment of a trustee was in the interеsts of the creditors was not an abuse of discretion.
V. Woodlawn’s Social Service Mission
Woodlawn makes much of its status as a nonprofit organization, arguing that the bankruptcy court should have been particularly sensitive to the nature of the organization, and should have focused on allowing Woodlawn to continue providing housing services. [17] at 21. But the judge was fully aware of the unique nature of the organization, and even expressed hesitancy to appoint a trustee for a nonprofit. She noted Woodlawn’s role in the community and acknowledged that it had done “plenty of good.” It was for that exact reason that the judge felt Woodlawn needed an independent trustee to correct management’s past mistakes, and the judge expressed her hope that a trustee would have a positive effect on the organization. There is no indication in the record whatsoever that the judge expressed any insensitivity to Woodlawn’s mission, or to the communities it served. [12]
Woodlawn appears to suggest that its case warranted speсial consideration
because it was a social-service organization, although it does not argue that, legally,
§ 1104(a) applies differently to nonprofits. Nor could it. Section 1104 does not
distinguish between for-profit and nonprofit organizations, and Woodlawn points to
no authority suggesting that the judge should have treated Woodlawn differently.
The order here was not unprecedented. Courts have appointed Chapter 11 trustees
*33
to run nonprofit organizations or organizations with charitable missions.
See, e.g.
,
In
re United Church of the Ministers of God
,
Notably, other sections of the bankruptcy code specifically distinguish between
for-profit companies and not-for-profit organizations, which the code refers to as
corporations that are “not a moneyed, business, or commercial corporation.”
See, e.g.
, 11 U.S.C. §§ 303(a), 1112(c). A non-moneyed business or commercial corporation is
“equivalent to the modern-day terms ‘not-for-profit’ or ‘non-profit.’”
In re Archdiocese
of St. Paul & Minneapolis
,
Finally, Woodlawn argues that appointing a trustee was the “death knell” of an “old and venerable community organization” that benefited underserved communities. But Finney rang that bell. Woodlawn’s management allowed him to operate with virtually limitless discretion, and Woodlawn is now paying the price. The fault lies with management, not the judge.
VI. Conclusion
The order of the bankruptcy court is affirmed.
E NTER :
___________________________ Manish S. Shah United States District Judge Date: March 13, 2020
Notes
[1] The U.S. Trustee plays a “watchdog role” in bankruptcy cases, and is a party in interest
who may be heard on cases under Chapter 11.
In re C.P. Hall Co.
,
[2] Citations are to the appendix furnished by the U.S. Trustee. [21-1]. Page numbers are taken from the CM/ECF header placed at the top of filings.
[3] At a creditors’ meeting, Finney stated that Lincoln South had paid rent, but “may” have been “late” “at times”; he could not remember the last time Lincoln South had paid rent to Woodlawn. [21-1] at 233. The judge found that Finney’s statement that he had paid some rent was not enough to rebut the “implicit admission” that Finney kept all the rent from the tenants without paying Woodlawn, and, in any event, Woodlawn’s general counsel testified at a creditors’ meeting that Lincoln South had never paid rent. [21-1] at 461, 468.
[4] Some of the parties’ filings еstimated the number to be $1.8 million, but the bankruptcy judge used the lower number in her findings of fact. [21-1] at 457.
[5] In an affidavit attached to the bankruptcy petition, Finney stated that he had been “completely surprised” by Woodlawn’s unpaid tax liabilities. [21-1] at 13. At a creditors’ meeting, he admitted that he had directed the diversion of that money. [21-1] at 220–21. The bankruptcy judge found that Finney made a false statement when he said he was surprised by the unpaid tax liability; the judge was “appalled” by that dishonesty. [21-1] at 360, 458– 59.
[6] Mohammad, the former CFO, left Woodlawn in the beginning of 2018. [21-1] at 215. Smith, the controller, reported to Mohammad, who reported directly to Finney. [21-1] at 90–91.
[7] At each of the court hearings, counsel appeared and represented the following entities: the U.S. Trustee; the CHA; the Committee; Woodlawn; Lakeside Bank, a secured creditor, [21-1] at 395–96; and the Chicago Regional Council of Carpenters and Welfare Funds, an unsecured creditor, [21-1] at 56. [21-1] at 256, 348, 424.
[8] The court did not characterize this conduct as incompetent, because it was intentional. [21- 1] at 458.
[9] “In a civil case, unless а federal statute or these rules provide otherwise, the party against whom a presumption is directed has the burden of producing evidence to rebut the presumption. But this rule does not shift the burden of persuasion, which remains on the party who had it originally.” Fed. R. Evid. 301.
[10] The idea that appointing a trustee is an extraordinary remedy, so must be justified by clear
and convincing evidence, appears to have originated in bankruptcy courts in the 1980s.
See
In re Tyler
,
[11] I decline to consider either Woodlawn’s allegations about the trustee’s post-appointment
effect on the organization,
see
[17] at 23–24, or the Committee’s assertions about the
bankruptcy judge’s rulings after the trustee took over. [33] at 2–4. Under the abuse-of-
disсretion standard, my review is limited to the evidence the bankruptcy judge had access to
at the time she made her decision.
Pruitt v. Mote
,
[12] The Committee moves to strike Woodlawn’s allegations from its brief that the judge’s
decision to appoint a trustee was “racially insensitive.”
See
[17] at 16; [22] at 5. Motions to
strike sections of an appellate brief are disfavored.
Redwood v. Dobson
,