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Keywords

appealhearingfiduciarytrustbankruptcychapter 11 bankruptcycorporation
equityappealhearingtrustwillbankruptcycorporationbinding agreement

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In re Sharon Steel Corp., 871 F.2d 1217, 19 Bankr.Ct.Dec. 415, Bankr. L. Rep. P 72,822

Facts

Sharon Steel Corporation, facing $742 million in liabilities and only $478 million in assets, filed for Chapter 11 bankruptcy in April 1987. The company was under the control of Victor Posner, who also managed DWG Corporation, which provided financial services to Sharon. After several months of perceived mismanagement, the creditors' committee petitioned for the appointment of a trustee. The bankruptcy court held hearings and ultimately appointed a trustee, citing ongoing mismanagement and the need for independent oversight.

Sharon Steel Corporation manufactures steel in a facility located near Sharon, Pennsylvania. The Sharon facility includes two blast furnaces. By April, 1987, only one of these—number 3—was operational. Sharon's most efficient blast furnace, number 2, was shut down pending $18 million in repairs. Furthermore, furnace number 3, which was three years overdue for relining, faced imminent shutdown. On April 17, 1987, confronted with $742 million in liabilities, only $478 million in assets, and pressing creditors, Sharon filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code.

Issue

Did the bankruptcy court err in appointing a Chapter 11 trustee for Sharon Steel Corporation based on the creditors' committee's petition?

The Court of Appeals, Gibbons, Chief Judge, held that appointment of Chapter 11 trustee was not abuse of discretion where there was evidence of systematic siphoning of debtor's assets to other companies under common control on eve of bankruptcy, and continuing postpetition mismanagement.

Rule

Under 11 U.S.C. § 1104, a bankruptcy court may appoint a trustee for cause, including gross mismanagement of the debtor's affairs, or if such appointment is in the interests of creditors and the estate.

The bankruptcy court relied on 11 U.S.C. § 1104 , which provides: (a) At any time after the commencement of the case but before confirmation of a plan, on request of a party in interest …, 8 and after notice and a hearing, the court shall order the appointment of a trustee— (1) for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause, but not including the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor; or (2) if such appointment is in the interests of creditors, any equity security holders, and other interests of the estate, without regard to the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor.

Analysis

The bankruptcy court found substantial evidence of both prepetition and postpetition mismanagement by Sharon's management, including asset transfers that could be considered fraudulent. The court determined that the management's actions demonstrated a failure to fulfill fiduciary duties, justifying the appointment of a trustee to protect the interests of creditors and ensure the viability of the business.

The bankruptcy court found that the committee satisfied its burden under both subsections, and we cannot say that it abused its discretion in so concluding.

Conclusion

The Court of Appeals affirmed the bankruptcy court's decision to appoint a trustee, concluding that the appointment was not an abuse of discretion given the evidence of mismanagement and the need for independent oversight.

Affirmed.

Who won?

The creditors' committee prevailed in the case as the court upheld the appointment of a trustee, citing the need for independent management due to the debtor's mismanagement.

Because no binding agreement existed to prevent the committee from petitioning for appointment of a trustee and because the bankruptcy court did not err in appointing a trustee for Sharon, we will affirm.

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