2009 Chapter 11 Recent Developments (Part I)

g. Trustees and Examiners

In re Blue Stone Real Estate, Construction & Development Corp., 392 B.R. 897 (Bankr. M.D. Fla. 2008)

Facts: Before the court was a motion (the "CRO Motion") by the Debtors for authorization to retain Steven Oscher and his firm (together, "Oscher") as Chief Restructuring Officer under §§ 105 and 363 of the Bankruptcy Code. Prior to the CRO Motion, though, the U.S. Trustee had filed a motion to appoint a chapter 11 trustee or an examiner in these cases. The UST and two creditors objected to the CRO Motion and argued that Oscher would be controlled by Mr. DeMaria, who was the principal of the Debtors, and whose actions prompted the UST to file his motion to appoint a trustee or examiner.

Issues: Whether the court may and should grant the CRO Motion in light of the UST's previous motion to appoint a trustee or examiner.

Rules:

(1)

"A proposed change of management following the filing of a still pending motion to appoint a Chapter 11 trustee is [not] proscribed by section 1104(a)(4)."

(2)

A proper reading of Section 1107(a) "is that a debtor in possession is not mandated to undertake certain investigative and reporting duties, but the bankruptcy court in its discretion can nonetheless prescribe such action-as well as other actions not encompassed within section 1106."

(3)

Also, § 1107(a) "contemplates that the state law powers of a corporation's board of directors can be altered while the corporation is a debtor in bankruptcy." In other words, § 1107(a) "permits the Court to alter the powers of the Debtors' boards of directors (and managers, in the cases of the Debtors that are limited liability companies) and impose requirements that will alleviate any concern, however unfounded, of a party in interest that... [a professional will not operate independently] with absolute control over the Debtors."

Holding: The court authorized Oscher's retention as CRO of the Debtors under § 327.

Reasoning: The legislative history of § 1107 indicates that a debtor in possession already operates as the functional equivalent of a chapter 11 trustee. And the legislative history of § 1104 "reflects a decided preference for leaving a debtor in possession in place." The court's obligation is ensure that the Debtors' estates are being operated for the benefit of the creditors and equity holders, which takes precedence over deference to the UST's view of how its own policies should be implemented. Here, the court will require Oscher to undertake the duties specified in § 1106(a)(2) and (3) and he may undertake the duties in § 1106(a)(4). Moreover, the court rejects the arguments that Oscher is not disinterested and cannot perform as effectively as a chapter 11 trustee - Oscher has substantial experience with bankruptcy, as a trustee and as a professional and would be beneficial to these cases. "No party in interest was able to articulate any credible difference between the skill set of a Chapter 11 trustee and the skill set that Mr. Oscher would bring to the table as a CRO." Moreover, no party was able to articulate any power that a chapter 11 trustee would have that Oscher would not have as CRO. Also under § 1107(a), the Debtors can operate without a board of directors, and for this reason also Oscher can avoid being at the whim of Mr. DeMalia.