In Re: G-I Holdings

Opinions of the United
2004 Decisions States Court of Appeals
for the Third Circuit
9-24-2004
In Re: G-I Holdings
Precedential or Non-Precedential: Precedential
Docket No. 03-3188
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"In Re: G-I Holdings " (2004). 2004 Decisions. Paper 267.
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PRECEDENTIAL Before: ALITO, SMITH, and BECKER
Circuit Judges
UNITED STATES COURT OF
APPEALS (Filed: September 24, 2004)
FOR THE THIRD CIRCUIT
____________ Elihu Inselbuch (Argued)
Caplin & Drysdale, Chtd.
03-3188 399 Park Avenue, 27th Floor
____________ New York, NY 10022
IN RE: G-I HOLDINGS, INC. Peter Van N. Lockwood
f/k/a/ GAF CORPORATION, Trevor W. Swett
Albert G. Lauber
Debtor Caplin & Drysdale, Chtd.
One Thomas Circle, N.W.
THE OFFICIAL COMMITTEE Washington, D.C. 20005
OF ASBESTOS CLAIMANTS,
Counsel for Appellant
Appellant
Martin J. Bienenstock (Argued)
v. Weil, Gotshal & Manges LLP
767 Fifth Avenue
G-I HOLDINGS, INC. New York, NY 10153
f/k/a GAF CORPORATION;
ASBESTOS DEMAND HOLDERS; Dennis J. O'Grady
UNITED STATES DEPARTMENT Riker, Danzig, Scherer, Hyland
OF JUSTICE; UNITED STATES & Perretti LLP
DEPARTMENT OF TRUSTEE; Headquarters Plaza
BANK OF NEW YORK One Speedwell Avenue
____________________ Morristown, NJ 07962
ON APPEAL FROM THE UNITED Counsel for Appellee
STATES DISTRICT COURT ____________________
FOR THE DISTRICT OF NEW
JERSEY OPINION
____________________ ____________________
(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 *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
standard. Because we see no support for which is now relevant. 1 The argument
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 (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
2
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
3
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 truste e 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
4
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 before or afte r the
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, 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.
fraud, dishonesty,
incompetence, or gross The Committee’s argument in this
mismanagement of the appeal is based on our reference in Marvel
5
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 are two 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
6
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.” because “current
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 hin de r a s u c c e s sf 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 1995) . 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 possession’s usual
convincing evidence.” See familiarity with the business
7
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
o p erations 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 at 1226.
140 F.3d at 471 (emphasis added) (citation
c o n v in c i n g e v i d en 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.
8
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
9
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 tw o
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.
10