No. 80-B11700.United States Bankruptcy Court, S.D. New York
July 9, 1981.
Bankruptcy Reform Act — Reorganizations — Trustees —Business Operations — Decision to Terminate
GALGAY, Bankruptcy Judge.
A court will not evaluate the prospects of a debtor-business in the absence of evidence that the trustee’s decision to terminate operations in the best interests of the creditors was clearly erroneous. Chapter XI proceedings do not guarantee the indefinite existence of a financially plagued business. Section 1106(a) of the Bankruptcy Code specifies that unless the court orders otherwise the trustee shall investigate the desirability of continued operation of the debtor’s business. After there was ample opportunity for the parties to reach an accomodation, and with substantial evidence that continuation of business will impair creditors’ interests, the decision of the trustee to terminate operations stands.See Sec. 1106(a) at ¶ 12,015.
[Opinion of the Court]
Joseph Dugas, as trustee of Ginsburg Manufacturing Co., Inc. (GMC) and G.C. Lingerie Corporation (GCL) has moved for authorization to terminate the employment of Arnold, Everett, Jessee and Benjamin Ginsburg, and Norton Goland (the Ginsburgs). This request is based on the trustee’s determination that the operations of GMC and GCL, the two remaining manufacturing enterprises in the Ginsburg empire, are not viable entities and, in the best interest of creditors, should be terminated.
On October 14, 1980 the petitions for reorganization under Chapter 11 of the Bankruptcy Code were filed by various enterprises owned and operated by the Ginsburgs. On October 31, 1980 upon motions of the two largest secured creditors, Chemical Bank and Manufacturers Hanover, and after extensive and explosive hearings, this court directed the U.S. Trustee under section 151104 of the Code to appoint a disinterested person to investigate and manage the corporations with the aid of the Ginsburgs who were to remain as employees. On November 3, 1980 the appointment of Joseph Dugas, Certified Public Accountant with an extensive background in the textile industry, was approved by this Court. What the Court is actually being asked to do is to override the business judgment of the trustee to terminate the manufacturing operations, and to substitute the Court’s judgment for his. Pursuant to the authority granted to the trustee under Section 1106 of the Code, he has made a judgment call which this Court must review to determine if his discretion was exercised after consideration of factors consistent with the legislative purpose. Albermarle Paper Co. v. Moody, 422 U.S. 405 (1974). This trustee has labored hard to continue these manufacturing operations and has moved to terminate them only after careful review of prospective orders and accountants’ projections. As the evidence presented at the hearings held on July 1 and 8 failed to show that the trustee’s judgment is clearly erroneous, this Court declines to evaluate on its own the business prospects of GMC and GCL, and grants the trustee’s motion.
It must be noted that the banks have steadfastly taken the position that the value of their security interests in the machinery and equipment of these manufacturing operations was being impaired by the continued operations. The banks had filed a motion for adequate protection and began an action to lift the automatic stay pursuant to Section 362(d)(1) of the Code on December 22, 1980. An initial hearing was held on January 7, 1981 which has been adjourned from time to time by consent of the parties so that discovery, including extensive appraisals, and negotiations could take place. Although it is clear under Section 362(e) that this Court has the power to delay any foreclosure by secured creditors while hearings are conducted to determine whether security interests are adequately protected, that power cannot be extended indefinitely.
This Court has held various proceedings, both on and off the record, in order to give the trustee and the debtors an opportunity to reach some accomodation with its secured creditors. Today (7/8/81) an offer was made by the Ginsburg family, the sole stockholders, and an outsider, Georgia Narrows Fabrics, to purchase the manufacturing operations. The amount of the offer was insufficient to induce the banks to change their position as one of the conditions of the offer requires that the manufacturing operations continue occupying the Tuscombia, Alabama plant. The lease of that property had previously been assigned to the banks as additional collateral. Professional real estate experts have informed the Court and the parties that continued occupancy of a section of the plant would have a substantially adverse effect on the marketability of the lease.
A representative for the ILGWU, in a most generous gesture, offered to withdraw the union’s claim of almost half a million dollars against the debtors on condition that the Ginsburgs be allowed to continue operation at the Tuscombia plant at such a level so as to employ between 100 and 300 of its union members. This offer did not change the position of either the secured creditors or the trustee.
In final analysis, there has been a decision by the trustee pursuant to Section 1106(a) of the Code that termination of the operations at the Tuscombia plant is in the best interests of creditors. With that termination, continued employment of the Ginsburgs would be an unnecessary cash drain on this estate. The Ginsburgs, understandably, have vigorously objected to the Trustee’s motion and to his intention to wind down the operations. But as the Court of Appeals of the Seventh Circuit so aptly stated, when faced with a challenge by certain creditors and stockholders of a debtor corporation to a bankruptcy court’s refusal to set aside an adjudication of a 50 year old company with hundreds of employees and to reinstate the Chapter XI proceedings, “Although we agree that Chapter XI provides a vehicle for rehabilitating financially ill corporations, that enactment by no means guarantees continued existence to every plagued corporation.” In re Webcor, 392 F.2d 893, 897 (7th Cir. 1968).
For all of the above reasons, this Court grants the motion of the Trustee to terminate the employment of the Ginsburgs.
It is so ordered.