Official Comm. of Unsecured Creditors v. Constellation Enters. LLC (In re Constellation Enters. LLC)
Official Comm. of Unsecured Creditors v. Constellation Enters. LLC (In re Constellation Enters. LLC)
Opinion of the Court
Appellant, the former Official Committee of Unsecured Creditors ("Committee") appointed under
I. BACKGROUND
On May 16, 2016, the Debtors filed for relief under chapter 11. Following court-approved sales of substantially all of their assets, the Debtors and the Committee, on September 8, 2016, filed the Joint Motion of the Debtors and Creditors' Committee for an Order Approving Settlement by and Among the Debtors, the Creditors' Committee, the Purchaser and the Ad Hoc Noteholders Group (B.D.I. 560) ("Settlement Motion"). The Settlement Motion sought approval of a "structured dismissal" that included a case-ending mechanism and a settlement agreement to distribute assets to certain creditors. While the motion was pending before the Bankruptcy Court, the Supreme Court issued Czyzewski v. Jevic Holding Corp. , --- U.S. ----,
The proposed settlement at issue here was a structured transaction whereby the Debtors transferred assets to their secured creditor in an asset sale, and in turn, the secured creditor would transfer these assets to a settlement trust for distribution to unsecured creditors while skipping creditors of higher priority. The Committee posited that this was permissible because the settlement assets to be distributed to unsecured creditors were not estate property. The Bankruptcy Court rejected that argument, holding that, even if ICL Holding survived Jevic , the proposed settlement, as a matter of fact, did not fall within the ambit of ICL Holding , and thus denied the motion to settle. (See Civ. No. 17-757, D.I. 10-1, 5/16/17 Hr'g. Tr. at 246:23-248:15). The Settlement Denial Order was entered on May 16, 2017. (B.D.I. 963). On May 30, 2017, the Committee timely appealed the Settlement Denial Order. (See Civ. No. 17-757, D.I. 1). The Debtors did not appeal the Settlement Denial Order, nor did any individual creditor or other party in interest.
*279On June 23, 2017, the Debtors moved to convert their chapter 11 cases to chapter 7 pursuant to § 1112(a) of the Bankruptcy Code (B.D.I. 1008) ("Conversion Motion"), citing, inter alia , the administrative insolvency of the chapter 11 cases. (Id. at 4-5; B.D.I. 1126). The Committee urged the Bankruptcy Court to deny the Conversion Motion based on an "equitable analysis of the facts," namely, that the Debtors had agreed to support the Settlement Motion, that conversion would jeopardize the Committee's appeal of the Settlement Denial Order, and that, absent reversal of the Settlement Denial Order, the unsecured creditors stood no chance of recovery on their claims. (See B.D.I. 1028 at 1-3, 13-16) (citing In re Adler ,
The Trustee and the DDTL Parties have moved to dismiss the appeal of the Settlement Denial Order (Civ. No. 17-757, D.I. 43 & 44) and the appeal of the Conversion Order (Civ. No. 17-1430, D.I. 8 & 9) ("Motions to Dismiss"). The merits of the appeal of the Settlement Denial Order are fully briefed. (Civ. No. 17-757, D.I. 25, 33, 38, 42). Merits briefing on the appeal of the Conversion Order was stayed at the request of the parties pending the Court's decision on the Motions to Dismiss. (See Civ. No. 17-1430, D.I. 29). The Motions to Dismiss are fully briefed (Civ. No. 17-757, D.I. 43, 44, 45, 48, 49; Civ. No. 17-1430, D.I. 8, 9, 30, 31, 32). On February 9, 2018, the Court held oral argument on the Motions to Dismiss. (See Civ. No. 17-757, D.I. 57).
II. CONTENTIONS
The Trustee and DDTL Parties argue that, immediately upon the conversion of the Chapter 11 cases on October 2, 2017, "the Committee automatically dissolved and ceased to exist." (Civ. No. 17-1430, D.I. 8 at 4). "As mandated by the structure of the Bankruptcy Code, established by case law, and accepted by commentators, the Committee automatically dissolved upon the conversion of Constellation's case to chapter 7." (Id. , D.I. 9 at 2). "Accordingly, the Committee had neither the power nor authority to file the Notice of Appeal [of the Conversion Order] on October 11, 2017." (Id. , D.I. 8 at 4). "Moreover, as the Committee is now dissolved, it has neither the power nor authority to continue to prosecute the Conversion Appeal."
*280According to the Trustee, the sole appellant has dissolved, and therefore all pending suits, by or against it, must abate. (Civ. No. 17-757, D.I. 44 at 5-6). "The Supreme Court has held that, absent statutory authority providing otherwise, just 'as the death of [a] natural person abates all pending litigation to which such a person is a party, dissolution of a corporation at common law abates all litigation in which the corporation is appearing.' " (Id. ) (quoting Oklahoma Natural Gas Co. v. Oklahoma ,
[C]orporations exist for specific purposes, and only by legislative act, so that if the life of the corporation is to continue even only for litigating purposes it is necessary that there should be some statutory authority for the prolongation. The matter is not really procedural or controlled by the rules of the court in which the litigation pends. It concerns the fundamental law of the corporation enacted by the state which brought the corporation into being.
Oklahoma Natural Gas ,
The Committee raises several arguments in opposition to the Motions to Dismiss. The Committee argues that the Motions to Dismiss should be denied because they are premised solely upon the Conversion Order, which should be reversed. (Civ. No. 17-276, D.I. 23 at 3). According to the Committee, the Bankruptcy Court erred as a matter of law by declining to conduct an evidentiary hearing on whether conversion was appropriate or justified at that time in the chapter 11 cases. (See id. at 3-4; Civ. No. 17-757, D.I. 45 at 17-19). The Committee further argues that, even if Conversion Order was properly entered, no provision of the Bankruptcy Code compels the Committee's dissolution upon conversion. (See Civ. No. 17-757, D.I. 45 at 8-16). Finally, even if the Bankruptcy Code mandates the Committee's dissolution *281post-conversion, the Committee contends that it enacted a bylaw amendment purporting to transfer its rights in the appeal to an ad hoc committee of its former members, which now may pursue the Committee's rights in the appeal. (See id. at 22-23).
III. JURISDICTION AND STANDARD OF REVIEW
The Court has jurisdiction over the appeals pursuant to
IV. DISCUSSION
A. The Committee Automatically Dissolved Upon Conversion
Because the Debtors' chapter 11 cases have now been converted to cases under chapter 7, Appellees argue that the Committee has automatically dissolved, and the appeals must be dismissed. Appellees argue that, upon conversion, the legal entity that was the Committee ceased to exist; therefore, it had no authority to appeal the Conversion Order, and, as the sole appellant of the Settlement Denial Order, no longer has the authority or power to continue its appeal of that order either. (See Civ. No. 17-757, D.I. 43 at 4). According to the Trustee, numerous courts and commentators agree that a chapter 11 committee terminates upon conversion to chapter 7. (Id. , D.I. 44 at 2-3). Moreover, continued existence post-conversion as proposed by the Committee would raise a host of practical issues not addressed at all by the Bankruptcy Code and Bankruptcy Rules. (Id. , D.I. 48 at 6-7). Conversely, the Committee argues that § 348 of the Bankruptcy Code, which governs the effect of conversion, does not provide for the automatic termination of the Committee nor for the loss of its rights. (Id. , D.I. 45 at 3, 9). The Committee argues that Bankruptcy Code is silent as to the effect of conversion on the rights and duties of a creditors' committee and that case law has implicitly recognized the right of a committee to continue an appeal post-conversion. (Id. at 9-10).
The Court agrees that the legal entity that was the Committee automatically dissolved and ceased to exist as of the conversion of the chapter 11 cases to chapter 7. An official committee of unsecured creditors is created when appointed by the Trustee under § 1102 of the Bankruptcy Code, and it exists only under the framework of chapter 11. Section 103(g) of the Bankruptcy Code provides that, subject to an exception not applicable here, §§ 1101 through 1146-which include the creditors' committee formation provision in § 1102 and the creditors' committee's powers and duties in § 1103-"apply only in a case under such chapter"-i.e. , chapter 11. See
Numerous courts have agreed that upon conversion to chapter 7, the chapter 11 committee of unsecured creditors is terminated. See In re World Health Alternatives ,
B. Case Law Does Not Support Post-Conversion Existence of the Committee
The Committee argues that conversion does not mandate its dissolution nor any forfeiture of its rights in the appeal of the Settlement Denial Order. (See Civ. No. 17-757, D.I. 45 at 2). The Committee argues it may continue to exist post-conversion, not "to exercise plenary powers" under the Bankruptcy Code, but rather "to exercise vested rights." (Id. , D.I. 57, 2/9/18 Hr'g. Tr. at 12:13-18). In support of this argument, the Committee "urges this Court to follow the First Circuit's adjudication of SPM " and "adopt a rule that permits a creditors' committee to retain its vested legal and property rights following conversion, and [c]ontinue with an appeal properly perfected prior to the act of conversion." (Id. , D.I. 45 at 15-17) (citing In re SPM Manufacturing Corp. ,
In SPM , the First Circuit resolved an appeal pursued by a chapter 11 committee post-conversion. Importantly, no party moved to dismiss the appeal based on the conversion of the debtor's case and the dissolution of the committee. See SPM ,
*283Great Northern Paper ,
Aside from SPM , the Committee cites only a single case where a chapter 11 creditors' committee survived conversion to chapter 7 under any circumstances, and that was by express order of the Bankruptcy Court pursuant to § 105(a). (See Civ. No. 17-1430, D.I. 30 at 4) (citing In re Lyons Transportation Lines, Inc. ,
At the outset of its analysis, the Lyons court observed that "[n]ormally, counsel for a Creditors' Committee ceases all work after the conversion of a Chapter 11 case to a case under Chapter 7 as the conversion results in the dissolution of the Creditors' Committee along with the right of Committee's counsel to compensation for post-conversion services."
In absence of any supporting case law, the Committee argues that, in the "related context" of a committee's existence post-plan confirmation, "courts have mostly agreed that a committee is not *284dissolved and may continue to function," as § 1103(c)(5) empowers a committee to "perform such other services as are in the interest of those represented." (Civ. No. 17-757, D.I. 45 at 10-11). However, § 103(g) expressly provides that § 1103, and its subsection (c)(5) "catchall provision," apply only to a case in chapter 11. See
The Court is persuaded by Great Northern Paper , a case which directly addressed the same question at issue here: "[w]hat happens to a pending appeal by the Official Committee of Unsecured Creditors when the bankruptcy court converts a chapter 11 proceeding to a chapter 7 proceeding during the appeal?"
C. No Party Has Appealed the Conversion Order
According to the Committee, the Motions to Dismiss are based solely on the conversion of the chapter 11 cases, but "[t]he Conversion Order ... was improperly entered, and should be stayed and then reversed by this Court as a matter of law because of the refusal of the Bankruptcy Court to conduct an evidentiary hearing on whether conversion was appropriate or justified at this time in these cases." (Civ. No. 17-757, D.I. 45 at 4). Because the Committee asserts that the Conversion Order was entered erroneously,
Taken together, the Conversion Order and the relief sought in the Motions to Dismiss would mean that a bankruptcy court can grant a debtor's motion to convert without any opportunity for an opposing party-even an estate fiduciary such as an official committee of unsecured creditors-to be heard or afforded due process. Instead, debtors would have the unilateral ability to divest an official committee of its statutory rights, and all related rights and powers arising under law, including vested appeal rights. Permitting conversion to operate as a dissolution of a committee and the forfeiture of all of its vested rights runs afoul of basic due process and should not be permitted.
(D.I. 45 at 5). The Court does not accept the Committee's "parade of horribles" argument. Any creditor could have appealed the Settlement Denial Order or the Conversion Order. No creditor chose to take on the expense of appealing either order, and they are now time-barred from doing so.
D. Congress Did Not Authorize the Committee to Transfer Rights or Interests
The Committee argues that, even if this Court finds that conversion resulted in the Committee's dissolution, an "ad hoc committee" of former members, as its successor, may be substituted as the appellant in the appeal of the Settlement Denial Order. (See D.I. 45 at 22). This ad hoc committee "has or will be vested with the right of the Committee to maintain this appeal" pursuant to a unilateral bylaw amendment adopted by the Committee prior to the Conversion Order having become effective:
[i]n the event any court of competent jurisdiction determines that the Committee has ceased to exist, has dissolved or has been divested of its powers or of its ability to pursue the appeal of the decision and order issued on May 16, 2017 by the [Bankruptcy Court] which denied the Joint Motion of the Debtors and Creditors' Committee for an Order Approving Settlement by and among the Ad Hoc Noteholder Group [Doc. No. 560] (the "Appeal"), the Members hereby elect to continue to function as an "ad hoc" committee of unsecured creditors *286("Ad Hoc Committee"), in order to protect the interest of the Committee and/or its Members in the Cases and the Appeal and to prosecute the Appeal.
...
Upon entry of (a) any order converting the Cases to cases under Chapter 7 of the Bankruptcy Code (a "Conversion Order"), and (b) a binding, judicial determination that the Committee has been dissolved, terminated or otherwise rendered incapable of proceeding with (i) the prosecution of the Appeal, (ii) approval of the settlement subject to the Appeal, or (iii) any matter related thereto, the Committee shall automatically be deemed reconstituted as the Ad Hoc Committee, which reconstitution shall be deemed to have occurred prior to the effective date and time of entry of a Conversion Order, without further action on the part of the Committee.
(Id. at 6-7, 22 (citing Article XIV.A-.B, Amended and Restated By-Laws) ). The Committee argues that, upon the occurrence of the events set forth above, it was reconstituted as the Ad Hoc Committee and "successor in interest" to the Committee in the appeals. (Id. at 22).
The Trustee argues that Federal Rule of Civil Procedure 25(c), which governs the substitution of parties and speaks to the situation in which "an interest is transferred" during the pendency of an action, applies only if "substantive law allows the action to continue" upon dissolution of a party. (See Civ. No. 17-757, D.I. 48 at 9-10) (citing 7C Charles Alan Wright & Arthur Miller, FED. PRAC. & PROC. CIV. § 1958 (3d ed. 2007) ). There is no provision in the Bankruptcy Code that permits the Committee to hold or transfer rights or interests, nor is there any provision that permits the Committee to transfer its statutory duties to another entity. And there could be no "transfer" here, because the nature of any interests the Committee, as a statutory body and fiduciary, asserted in the appeal of the Settlement Denial Order are of wholly different cloth than personal interests held post-conversion by individual creditors. Only Congress may determine whether there is a successor in interest to a dissolved federal entity. The entity may not on its own name a successor to which it transfers its interests. See Organic Cow, LLC v. Center for New England Dairy Compact Research ,
Finally, the Court rejects the Committee's argument that it is "properly viewed as a creature of state law." (Civ. No. 17-757, D.I. 45 at 16). As an entity created and empowered by federal statute to exist solely for the duration of a chapter 11 bankruptcy case in a federal bankruptcy court, the Delaware statutes governing Delaware corporations are clearly inapplicable to the Committee. The question of whether the Committee may litigate post-conversion is solely one of federal law. See ASEDAC ,
V. CONCLUSION
A creditors' committee exists only under the statutory framework of the Bankruptcy Code. When these cases converted, the chapter 11 order for relief became an order for relief under chapter 7, the statutory predicate for the existence of Committee no longer applied, and the Committee automatically dissolved. As the Committee has dissolved, it has no capacity or authority *287to appear before this Court, including filing the notice of appeal of the Conversion Order and any filings made in further prosecution of the appeal of the Settlement Denial Order. Because the Committee has no capacity to pursue these appeals, and there is no co-appellant to pursue these appeals, the appeals must be dismissed. Accordingly, the Court dismisses the Motion for Stay Pending Appeal as moot. A separate order shall be entered.
The docket for the Chapter 11 cases, captioned In re Constellation Enterprises LLC, et al. , Case No. 16-11213-CSS (Bankr. D. Del.), is cited herein as "B.D.I. ___."
The DDTL Parties are the Prepetition Delayed Draw Term Lenders together with the Prepetition Delayed Draw Term Loan Agent. (See Civ. No. 17-1430, D.I. 8 at 1).
The DDTL Parties further argue that the appeal of the Settlement Denial Order must be dismissed on mootness grounds as well. (See Civ. No. 17-757, D.I. 43 at 3). According to the DDTL Parties, courts have consistently held that the conversion of a petition from one chapter to another serves to moot an appeal taken from a pre-conversion order. (See
To the extent the Committee's post-confirmation cases address an unsecured creditors' committee's existence post-conversion or post-dismissal, those cases also acknowledge that a committee is dissolved. See Official Comm. of Unsecured Creditors of WorldCom, Inc. v. SEC ,
The Court does not reach the merits of the appeal of the Conversion Order.
Bankruptcy Rule 8013(g) provides in relevant part: "Unless a statute provides otherwise, an entity that seeks to intervene in an appeal pending in the district court or BAP must move for leave to intervene and serve a copy of the motion on the parties to the appeal. The motion or other notice of intervention authorized by statute must be filed within 30 days after the appeal is docketed." Fed. R. Bankr. P. 8013(g).
Reference
- Full Case Name
- IN RE: CONSTELLATION ENTERPRISES LLC, Debtors. Official Committee of Unsecured Creditors v. Constellation Enterprises LLC, Office of the United States Trustee, Representative Trevor Miller, DDTL Parties, United States
- Cited By
- 7 cases
- Status
- Published