409 B.R. 163
No. 08-36021-H4-7.United States Bankruptcy Court, S.D. Texas.
June 26, 2009.
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Red River Energy, Inc., Chicago, IL, pro se.
Jeffrey S. Davis, Attorney at Law, Cleburne, TX, for Petitioning Creditors.
Jeffrey Davis, Michael J. Rogers, PC, Cleburne, TX, pro se.
Timothy Aaron Million, Munsch Hardt Kopf Harr, P.C., Houston, TX, for Trustee.
Ellen Maresh Hickman, Office of the U.S. Trustee, Houston, TX, for U.S. Trustee.
MEMORANDUM OPINION ON TRUSTEE’S MOTION TO DESIGNATE CRESTVIEW CAPITAL MASTER, LLC AND RUBICON MASTER FUND AS THE ENTITIES RESPONSIBLE TO DISCHARGE DUTIES OF THE DEBTOR UNDER FEDERAL RULE OF BANKRUPTCY PROCEDURE 9001(5) [Docket No. 33.]
JEFF BOHM, Bankruptcy Judge.
As a preliminary matter, the Court wishes to express its appreciation for the hard work and professionalism of all counsel for the parties. The clients should know that their respective counsel did excellent work; and this Court’s decision, while it will no doubt dissatisfy some, and perhaps all, of the parties, should in no way diminish the superb efforts of the attorneys. The clients should know that each of their counsel did stellar work.
The matter before this Court began with an involuntary bankruptcy petition of a completely defunct corporation bereft of any officers and directors. Because the Debtor is a corporation, a representative of the Debtor must be appointed to fulfill the Debtor’s duties. These duties include the responsibility to file schedules and release other information about the Debtor under oath. In the case at bar, these schedules and information are absolutely essential to the administration of the
bankruptcy estate, and this Memorandum Opinion discusses who must serve as the Debtor’s representative to ensure that these duties are performed with full disclosure and accuracy.
The Trustee has filed a motion to appoint Rubicon and Crestview, two corporate shareholders who, together, hold the majority of the stock of the Debtor, and have exercised control over the Debtor throughout most of its existence. Conversely, Rubicon and Crestview have sought to avoid the duty of serving as the Debtor’s representative, and have instead urged the Court to appoint Gary Burns, the former Chief Restructuring Officer of the Debtor, who resigned four months prior to the filing of the involuntary petition, was never directly employed by the Debtor, and has no personal knowledge of the key transfers and events that the Trustee must investigate in this case. Despite these glaring deficiencies in the appointment
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of Burns, Rubicon and Crestview continue to encourage his designation so that they may avoid the burden of filing statements of financial affairs and schedules with the Court under oath. However, the Court concludes that this responsibility is appropriately placed on Rubicon and Crestview’s shoulders.
II. FINDINGS OF FACT
III. CREDIBILITY OF WITNESSES
At the hearing on the Motion, two witnesses testified: the Trustee and Burns. The Court finds that both witnesses were credible.
IV. CONCLUSIONS OF LAWA. Jurisdiction and Venue
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. This contested matter is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A) and (O). Additionally, this proceeding is a core proceeding under the general “catch-all” language of 28 U.S.C. § 157(b)(2). See In re Southmark Corp., 163 F.3d 925, 930 (5th Cir. 1999) (“[A] proceeding is core under section 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case.”); In re Ginther Trusts, No. 06-3556, 2006 WL 3805670, at *19 (Bankr. S.D. Tex. Dec. 22, 2006) (holding that a matter may constitute a core proceeding under 28 U.S.C. § 157(b)(2)
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“even though the laundry list of core proceedings under § 157(b)(2) does not specifically name this particular circumstance”). Venue is proper pursuant to 28 U.S.C. § 1408(1).
B. Federal Rule of Bankruptcy Procedure 9001(5) expresslyauthorizes the appointment of a controlling shareholder.
Federal Rule of Bankruptcy Procedure 9001(5) (Bankruptcy Rule 9001(5)) states that:
“When any act is required by these rules to be performed by a debtor or when it is necessary to compel attendance of a debtor for examination and the debtor is not a natural person: (A) if the debtor is a corporation, `debtor’ includes, if designated by the court, any or all of its officers, members of its board of directors or trustees or of a similar controlling body, a controlling stockholder or member, or any other person in control . . .”
Fed.R.Bankr.P. 9001(5) (emphasis added).
The Supreme Court has held that the “plain language” and “express terms” of the Bankruptcy Code (the Code) will dispose of questions regarding the application of the Code. Toibb v. Radloff, 501 U.S. 157, 160-61 (1991). This holding also applies to the Federal Rules of Bankruptcy Procedure. See In re Thomas, 203 B.R. 64, 67 (Bankr. E.D. Tex. 1996) (applying plain meaning doctrine to bankruptcy rules) (citing Taylor v. Freeland Kronz, 503 U.S. 638, 643-44 (1992)). Under the plain meaning of Bankruptcy Rule 9001(5), a “controlling stockholder” may be designated by the Court.
In the case at bar, Rubicon is unquestionably a controlling shareholder; it owns the most stock of any shareholder, [Finding of Fact No. 9.], and its percentage ownership (45%) constitutes control. See, e.g., Riggs Nat. Bank of Wash. D.C. v. Allbritton, 516 F. Supp. 164, 179 (D.D.C. 1981) (holding that ownership of thirty-five percent of total outstanding shares of a stock constitutes effective control); 15 U.S.C. § 80a-2(a)(9) (presuming control by “any person who owns . . . more than 25 per centum of the voting securities of a company”). Burns, on the other hand, has never owned any shares of the Debtor’s stock, and therefore could not possibly be a controlling shareholder. Accordingly, because Rubicon is a “controlling shareholder,” under the plain meaning of Bankruptcy Rule 9001(5), this Court may appoint Rubicon as the representative of the Debtor, but it may not appoint Burns.
Rubicon and Crestview contend that Bankruptcy Rule 9001(5) only allows the Court to appoint individuals, not corporations, as a representative of the Debtor. Specifically, Rubicon and Crestview point to the phrase in Bankruptcy Rule 9001(5) “or any other person in control” to support its contention that this Court may appoint only an individual, and not a corporation, as the Debtor’s
representative. This Court disagrees. Under the Code, the
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definition of “person” includes “individual, partnership, and corporation.” 11 U.S.C. § 101(41). Therefore, the phrase “any other person in control” can mean any other “individual” in control, or any other “partnership” in control, or any other “corporation” in control.
Indeed, it is generally accepted that corporations, as well as individuals, may hold stock in another corporation. See generally, e.g., Tex. Bus. Orgs. Code Ann. § 2.101; Del. Code Ann. tit. 8, § 123; N.Y. Bus. Corp. Law § 202(a)(6). Here, Rubicon — a company incorporated under the laws of the Cayman Islands [Finding of Fact No. 2.] — acquired shares in the Debtor, which is incorporated under the laws of Delaware. [Finding of Fact Nos. 1 4.] While Delaware courts have consistently held that Delaware corporations may be shareholders,  there is scant authority to suggest that a company incorporated in the Cayman Islands may hold stock in a Delaware company. Despite this lack of authority, the Honorable Marvin P. Isgur, another Bankruptcy Judge sitting in the Bankruptcy Court for the Southern District of Texas, recently acknowledged that a company incorporated in the Cayman Islands may be a stockholder in a Delaware corporation. See In re Interamericas, Ltd., 321 B.R. 830, 832 (Bankr. S.D. Tex. 2005) (acknowledging that a company incorporated in the Cayman Islands held stock in a Delaware corporation). Therefore, the plain meaning of Bankruptcy Rule 9001(5) authorizes this Court to designate Rubicon, as a controlling shareholder of the Debtor, to serve as the Debtor’s representative in this case.
C. The date of filing of the bankruptcy petition controls.
In determining whom to appoint as the Debtor’s representative, this Court also believes that any “persons” who fall into any of the categories set forth in Bankruptcy Rule 9001(5) must have ties to the Debtor at the time of the filing of the bankruptcy petition.
The Bankruptcy Code and Rules specify that, in several instances, the date of filing is determinative for various issues. For example, Official Bankruptcy Form 6 requires a debtor to list secured and unsecured claims “as of the date of filing of the petition” and Federal Rule of Bankruptcy Procedure 1007 requires debtors to file documents “as prescribed by the Official Forms.” Additionally, 11 U.S.C. § 541 explicitly states that the commencement of an involuntary bankruptcy case creates an estate which is comprised of property “as of the commencement of the case.” 11 U.S.C. § 541. The Fifth Circuit has held that “as of the commencement of the case” means the petition filing date. In re Burgess, 438 F.3d 493, 496 (5th Cir. 2006). The Fifth Circuit has highlighted the importance of the filing date when it determined that a homestead exemption must be determined at the “date of filing of the original petition,” rather than the date of conversion from a Chapter 13 to a Chapter 7. Lowe v. Sandoval (In re Sandoval), 103 F.3d 20, 21 (5th Cir. 1997). The Fifth Circuit emphasized the filing date’s importance by holding that “income acquired after the original filing of the Chapter 13 petition and before conversion is not part of the converted estate.” In re Stamm, 222 F.3d 216, 217177
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(5th Cir. 2000). Further, the Fifth Circuit has held that post-petition crop-disaster-relief payments, even though based on pre-petition crop losses, were not to be considered part of the bankruptcy estate, because, among other reasons, the “critical time rernains the date of filing.” In re Burgess, 438 F.3d at 500.
In this case, the filing date is September 12, 2008. On September 12, 2008, the Debtor had no
officers, board members, trustees, controlling bodies, or “other person in control.” [Finding of Fact Nos. 32, 40, 41.] The only existing “persons” within the universe of Bankruptcy Rule 9001(5)’s laundry list of potential designees were the Debtor’s controlling shareholders — Rubicon and Crestview — and therefore one of these entities must be designated to perform the Debtor’s duties in this case.
The former Chief Restructuring Officer — Burns — may not be designated by the Court to handle the Debtor’s duties. As of the filing of the Debtor’s involuntary petition, Burns held no position whatsoever with the Debtor that falls within Bankruptcy Rule 9001(5)’s laundry list of “persons” who may serve as the Debtor’s representative. [Finding of Fact No. 23.] As of September 12, 2008, Burns was neither an officer, a director, a trustee, a controlling body, a controlling shareholder, nor a person in control. [Finding of Fact No. 41.] Indeed, he resigned as Chief Restructuring Officer of the Debtor in May of 2008, [Finding of Fact No. 41], four months prior to the filing date. Accordingly, because this Court concludes that Bankruptcy Rule 9001(5)’s laundry list encompasses only those “persons” with ties to the Debtor as of the filing date, Burns may not be designated as the Debtor’s representative.
D. In the alternative, even if this Court is incorrect about theneed to focus on the “persons” with ties to the Debtor on thepetition date and Bankruptcy Rule 9001(5) instead allowsappointment of a “person” without ties to the Debtor on thepetition date, the Court would still designate Rubicon orCrestview over Burns. 1. Burns, the former CRO of the Debtor, may not serve as theDebtor’s representative, given that his resignation was in no wayrelated to the bankruptcy petition and his testimony is notnecessary to the bankruptcy case.
Even if this Court is incorrect that Bankruptcy Rule 9001(5)’s laundry list of potential “persons” who may act as the Debtor’s representative must be viewed as of the petition date, the Court
would still not appoint Burns. The Second Circuit was willing to designate a former officer — i.e. an individual who departed prior to the petition date — as the debtor’s representative, but only where the officer parted ways with the company two weeks prior to the filing of the case in order to evade the bankruptcy proceedings. Greene v. Harris, 240 F.2d 275, 275 (2d Cir. 1957). In addition, at least one court has held that there must be some belief that the former officer’s testimony is necessary to the bankruptcy proceedings. In re Bell Refrigeration Corp., 169 F. Supp. 62, 64 (D.C. Ohio 1958).
In the present case, Burns resigned four months prior to the filing date, [Finding of Fact No. 41], and there is no evidence that he departed with the intent to evade involvement with the Debtor’s Chapter 7 case. Indeed, he could not have possibly known that there would be an involuntary petition filed four months after he resigned. Finally, as discussed below,
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Burns’s testimony is not necessary to the Debtor’s bankruptcy case, given Rubicon and Crestview’s superior knowledge and control of the Debtor.
2. Rubicon and Crestview must be deemed in control due to theirknowledge of the Debtor’s history in general, and the key affairsin particular, that occurred within days prior to the filing ofthe petition.
Rubicon and Crestview argue that Bankruptcy Rule 9001(5) requires the appointment of someone who is very knowledgeable about the Debtor’s daily affairs, particularly the affairs and events that occurred prior to the filing of the petition. Indeed, that is why they insist that Burns is the only one qualified to be the Debtors’s designated representative. They contend that Burns has much more knowledge than either of them.
Bankruptcy Rule 9001(5), however, contains no such “knowledge” requirement. Indeed, if anything, Bankruptcy Rule 9001(5) impliedly recognizes that the appointed representative might not
have substantial knowledge about the debtor’s affairs. After all, there are numerous directors on
boards throughout this country who are not well versed in the daily activities of the entity on whose board they sit. See, e.g., Church Point Wholesale Beverage Co., Inc. v. Voitier, 706 So. 2d 1015, 1020 (La.Ct.App. 1998) (noting that two members of the board of directors “knew little or nothing about the operation of the company”). That Bankruptcy Rule 9001(5) ought to require an appointed representative to have substantive knowledge may well have merit. However, even though “[f]elicity to statutory demands may produce outcomes that are burdensome to process and contrary to judicial expediency” the remedy “lies with the legislature, not the courts.” In re Schepps Food Stores, Inc., 148 B.R. 27, 31 (S.D. Tex. 1992). Accordingly, in the case at bar, even if Rubicon does not have extensive knowledge of the Debtor’s affairs — and this Court believes that Rubicon does have substantial knowledge — Bankruptcy Rule 9001(5) nevertheless authorizes this Court to designate Rubicon as the Debtor’s representative.
Indeed, this Court finds that Rubicon and Crestview have knowledge superior to all other potential designees, including Burns (assuming arguendo that Burns could be designated). While the standard. for requisite knowledge by a shareholder to serve as a debtor’s representative is unsettled by the Fifth Circuit In re Muy Bueno Corp. looked to the extent of a party’s knowledge compared to all other potential parties. 257 B.R. 843
(Bankr. W.D. Tex. 2001). In that case, the court held that an individual who had worked for the corporation briefly in the 1980s had only “little or no knowledge,” and therefore could not serve as the debtor’s representative in the Chapter 7 bankruptcy filed in 2000. Id. at 846. Further, that court explained that it needed to appoint “the person most likely to be knowledgeable.” Id.
at 847-48. This opinion indicates that a “person” must have “actual knowledge”
of the debtor’s recent affairs to become a debtor’s representative. Id. at 846. However, the facts in that case involved an individual clearly lacking adequate knowledge, as opposed to individuals with arguably sufficient knowledge. Id. Consequently,
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In re Muy Bueno Corp. does not address the situation in the case at bar where — assuming Burns had sufficient knowledge to act as the Debtor’s representative — there are three “persons” with extensive knowledge of the Debtor’s affairs.
Rubicon and Crestview contend that Burns is more knowledgeable about the Debtor’s affairs than either of them. This Court disagrees. Rubicon and Crestview’s knowledge is superior in four respects. First, Rubicon performed duties beyond those normally performed by shareholders, including serving as an agent for the Bridge Loan, redrafting the shareholder resolution, creating goals and priorities for the Chairman of the Board, and negotiating settlements with employees. [Finding of Fact Nos. 12, 16, 17, 21, 22.] This broad control was coupled with these entities’ minute supervision of e-mails, budget revisions, and changes in management. [Finding of Fact Nos. 33 34.] Rubicon and Crestview’s nearly constant access to the Debtor’s ongoing operations indicates that these entities have extensive knowledge of the Debtor’s affairs.
Second, as a corollary to Rubicon and Crestview’s superior knowledge of the Debtor’s affairs, they undeniably had unique insight into the Debtor’s operations, as evidenced by their demand that McCormick and Chandler step down. [Finding of Fact Nos. 20 21.] When the Debtor began experiencing financial difficulties, Rubicon and Crestview offered a loan to fund the Debtor’s continued operations. [Finding of Fact Nos. 20 21.] However, Rubicon and Crestview conditioned this further investment on the resignation of McCormick and Chandler. [Finding of Fact No. 21.] Because these two shareholders were adamant that McCormick and Chandler step down, they must have had a sound basis for their belief that McCormick’s and Chandler’s performance was lacking and
that there was another individual or individuals better able to serve. This belief necessarily shows — or at least strongly implies — that Rubicon and Chandler had detailed knowledge of the Debtor’s operations when those entities required McCormick and Chandler to resign.
Third, the extensive time period during which Rubicon and Crestview were involved with the Debtor indicates that these entities have superior knowledge about the Debtor’s affairs. Rubicon was an initial shareholder and member of the Debtor, and approximately one month later, Crestview acquired stock in the Debtor. [Finding of Fact Nos. 1 4.] Therefore, these two parties were involved with the Debtor from its origin and have significantly more experience with the company than Burns. Indeed, Rubicon and Crestview played a role in forming and carrying out the purposes and goals behind the formation of the Debtor. [Finding of Fact Nos. 3 6.] There is no one else in existence that has maintained such a long running relationship with the Debtor, as McCormick and Chandler left the company in January 2007, [Finding of Fact No. 23.], and, after their departure, Burns was involved with the Debtor for approximately seventeen months. [Finding of Fact Nos. 23 41.] Indeed, during Burns’s tenure, the Debtor had no employees and was in the process of winding down and bringing its operations to a close. [Finding of Fact Nos. 32 37.]
Rubicon and Crestview argue that they lack the necessary knowledge about the Debtor. [Resp. Brief 12.] However, their brief concedes that the individual named as the Debtor’s representative must be able to “respond to creditor inquiries.” [Resp. Brief 12.] By their own admission, the most knowledgeable designee should be named by the Court to fulfill the Debtor’s
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duties. As discussed above, of all the individuals or entities that have been involved in the Debtor’s operations, Rubicon and Crestview have been involved with the Debtor for the longest period of time, and therefore have superior knowledge of the most salient facts which are necessary to respond to creditor inquiries.
Additionally, that Rubicon and Crestview are the principal shareholders of the Debtor and have exercised nearly total control over the Debtor for the last four years militate in favor of appointing one of these entities as the Debtor’s designated representative.
Finally, Rubicon and Crestview also possess documents necessary to this bankruptcy case. Another court considered possession of documents and the importance of testimony to determine whether a particular individual should be appointed the debtor’s representative, noting that, “[d]ocurnents in his possession, custody, or control and his thorough examination . . . are . . . essential for the Debtor to be able to conduct this Chapter 11 case.” In re Continuum Care Servs., 375 B.R. 692, 694
(Bankr. S.D. Fla. 2007). Similarly, Rubicon and Crestview have both the knowledge and documents that are central to this case.
In the two years prior to filing, the Debtor distributed large amounts of money and property to various insiders and other entities outside of the ordinary course of business. [Finding of Fact No. 58.] The sum of payments made to insiders within one year of the petition date, according to the proposed Statement of Financial Affairs completed by Burns, is approximately $3,870,802.00, while the sum of transfers made outside the ordinary course of the Debtor’s business within two years of the petition date, according to the proposed Statement of Financial Affairs completed by Burns, is approximately $12,947,170.00. [Finding of Fact Nos. 60, 61.] Because these sums are so substantial, it is imperative that the designee has extensive knowledge of these distributions in order to provide the Trustee with the necessary information for him to properly investigate these transfers.
Specifically, a portion of this money and property transferred was the result of the sale of substantially all of the Debtor’s tangible assets for $13.15 million in June of 2008, even though the assets were valued at $44.0 million two years prior to the sale. [Finding of Fact No. 46.] The
difference between this appraised value and the actual sales price is approximately $31.0 million. [Finding of Fact No. 46.] Further, the purchaser of these assets, GAG, issued a press release to the effect that it had just purchased assets having a value of approximately $50.0 million. [Finding of Fact No. 47.] While it is possible that the Debtor’s assets had decreased in value by this margin, it is imperative that this sale is investigated to determine whether the amount received for the Debtor’s assets constitutes reasonably equivalent value.
Further, a substantial amount of the sale proceeds of $13.15 million were distributed to Rubicon and Crestview and, additionally, to their law firm, Greenberg Traurig. [Finding of Fact Nos. 48 58.] The proceeds of the sale were restricted as to their disbursement, and specifically earmarked for “secured creditors.” [Finding of Fact No. 39.] Given the strict restrictions put on the distribution of monies from the Debtor to its creditors, an investigation is necessary to ascertain the justification behind the payments to Greenberg Traurig and other select unsecured creditors, and why other unsecured creditors — for example, the four unsecured creditors who filed the involuntary petition initiating this case, [Finding of Fact No. 49] — received no monies whatsoever.
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By the time these distributions were made, Burns had already resigned, and the Debtor had no officers or directors. [Findings of Fact No. 40 41.] Burns conceded at the hearing that he does not have the documents memorializing the sale of the Debtor’s assets or the distribution of the sale proceeds. [Finding of Fact No. 59.] Only Rubicon and Crestview have this written information, and it is of the utmost importance for the Trustee to fulfill his fiduciary obligations to creditors of the Debtor’s estate by reviewing these documents and the sale transaction evidenced thereby. See In re Evangeline Refining Co., 890 F.2d 1312, 1323 (5th Cir. 1989) (noting that trustees have fiduciary duties); 11 U.S.C. § 704(4) (holding one of the trustee’s duties is to “investigate the financial affairs
of the debtor”); In re Graven, 84 B.R. 630, 631 (Bankr. W.D. Mo. 1988) (directing a trustee to investigate pre-petition transfers to self-created corporations). It is necessary that both the disbursement of the proceeds from the sale of the Debtor’s assets and the parties who received distributions from the Debtor are reviewed and investigated, and that documents presently in the possession of Rubicon and Crestview are made available to the Trustee for this investigation. Because Rubicon and Crestview are the only parties that can provide this written information, because they have more extensive knowledge about the key aspects of the Debtor’s affairs than does Burns — or anyone else — and because they are the only parties presently controlling the Debtor, Rubicon and Crestview are the most qualified candidates to act as the Debtor’s representative pursuant to Bankruptcy Rule 9001(5).
3. In addition to having substantial knowledge of, and controlover, the Debtor due to their sole possession of the documentsmemorializing the June 2008 sale, their orchestration of thedistribution of proceeds therefrom, and their majority interestin the Debtor, Rubicon and Crestview were in actual control ofthe Debtor by hand-picking the Debtor’s board and officers longbefore the June 2008 sale.
Rubicon and Crestview’s control over the Debtor is evident from the influence they exerted over the company and its employees from its conception until the filing date, in addition to Rubicon and Crestview’s manipulations of the Board of Directors.
According to the Bankruptcy Court for the Western District of Texas, the word “control” is intentionally undefined in the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure, in order to give each court a great deal of discretion in designating who should be in control. In re Muy Bueno Corp., 257 B.R. at 847-48. Because no standard exists for designating who should be in
control, courts must look to the unique facts of each case in order to reach a conclusion as to who is in control of the Debtor. For example, a written document conveying control to a particular individual as well as that individual’s purported access to the premises were found to be insufficient to establish “control” under Bankruptcy Rule 9001(5). In re King Brand Food Prods., Inc., 52 B.R. 109, 110 (Bankr. S.D. Fla. 1985). Conversely, an individual’s actual “duties and responsibilities,” based on the unique facts of the case, was a significant
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factor for another court’s determination of who was in control. In re Nw. Assocs., Inc., 245 B.R. 183, 186 (Bankr. E.D.N.Y. 1999). Finally, another court determined that the “creditor[‘s] . . . special relationship with the debtor” which included “compel[ing] payment of its debt” was sufficient to support the court’s conclusion that a creditor was in control of the debtor. In re F S Cent. Manuf Corp., 53 B.R. 842, 848
(Bankr. E.D.N.Y. 1985). This latter decision was also cited favorably by the Fifth Circuit in In re Fabricators, Inc., 926 F.2d 1458, 1465-66 (5th Cir. 1991).
While merely having the status of shareholder may be insufficient to support a conclusion that a “person” is in control,  Rubicon and Crestview’s actions went far beyond that of simply passive shareholders. First, Rubicon initially formed RR LLC, the predecessor to the Debtor, and held 80% of the interest in that company. [Finding of Fact No. 1.] One month later, Crestview joined the venture. [Finding of Fact No. 4.] The original Stockholders Agreement authorized Rubicon to appoint two members of the board, and barred the Debtor from amending the certificate of incorporation, bylaws, issuances of securities, mergers, sales, or any “similar transaction” without approval. [Finding of Fact Nos. 6 8.] Rubicon not only elected a board member — Hendrix — pursuant to the Stockholders Agreement, but also elevated him to the level of Chairman. [Finding of Fact No. 13.]
Rubicon then went on to dictate the new Chairman’s priorities as Chairman of the Board of Directors for the Debtor. [Finding of Fact No. 17.] Further, Rubicon and Crestview asserted control by overseeing changes in management. [Finding of Fact No. 35.]
At this time, Rubicon also began positioning itself for additional — and essentially virtual — control. Rubicon and Crestview were not given complete control by Chandler and McCormick and were unhappy with that arrangement. [Finding of Fact Nos. 15 19.] Rubicon planned to use its capital and loan to “obtain leverage” over the other Board members. [Finding of Fact Nos. 18 20.] Rubicon and Crestview denied additional capital (in the form of a loan) to the Debtor until McCormick and Chandler agreed to step down from the Debtor’s Board of Directors. Rubicon and Crestview were ultimately successful in leveraging the resignations they desired, after which Rubicon also negotiated their Settlement Agreement with the Debtor. [Finding of Fact Nos. 21 22.] This exercise of power exceeded that found in the Stockholders Agreement, which authorized only the election of board members, not their removal.
The Settlement Agreement also revised the original Stockholders Agreement, authorizing Rubicon and Crestview to appoint the entire Board of Directors, a far greater degree of control than the original Agreement permitted, which Rubicon intended to obtain well before it actually was able to do so. [Finding of Fact Nos. 16 24.] With this new control, Rubicon and Crestview then handselected a new Board of Directors, which then installed Burns as Chief Restructuring Officer. [Finding of Fact No. 23.] Burns’s selection came at the recommendation of Greenberg Traurig, which has been Rubicon and Crestview’s counsel for several years. [Finding of Fact Nos. 28, 43, 44.] Subsequently, during Burns’s tenure, Rubicon and Crestview micro-managed Burns’s efforts to sell the Debtor’s assets; for example, they required all emails with a “red flag” status to be forwarded to them. [Finding
of Fact No. 33.] Additionally, the loan provided by Rubicon and Crestview, which allowed them to oust the former board members, also paid Burns’s salary and covered other operational expenses. [Finding of Fact No. 25.] The loan provided
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by Rubicon and Crestview was also attached to a nonrefundable commitment fee of 3%, paid by — not surprisingly — the Debtor. [Finding of Fact No. 26.] From that time forward, Rubicon and Crestview had even greater control over the Debtor. For example, in February of 2007, budgets and “action plans” prepared by Burns were being sent to these two shareholders. [Finding of Fact No. 34.]
Rubicon and Crestview’s control over the Debtor is further evidenced by the other shareholders’ inaction. If Rubicon and Crestview’s allegations that they were mere shareholders with no control over the Debtor were true, then there would have been some evidence of involvement by the other shareholders in the turnover of the board or the sale of assets in June of 2008. As no such involvement has been shown, this Court can only conclude that Rubicon and Crestview exercised control over the Debtor.
Finally, Rubicon and Crestview’s assertion that the Court’s designee must have had day-to-day management over the Debtor extends the law too far. First, as noted earlier, the law intentionally refrains from defining control, which suggests that day-to-day operational control is not required. Second, the decisions wherein the courts cited day-to-day oversight as evidence of control involved circumstances where different individuals exerted a spectrum of influence over a corporation, where the courts were forced to choose between a designee with the absolute minimum of control and a designee with almost total control. See, e.g., In re Muy Bueno, 257 B.R. at 846; In re King Brand Food Prods., Inc., 52 B.R. at 110. Rubicon and Crestview’s control over the Debtor was wide ranging and, at times, absolute during the company’s short life span. In re Muy Bueno Corp. held that the
“designation decision rests within the discretion of the court.”257 B.R. at 848 (citing In re Little’s Motor Co., Inc., 53 B.R. 635, 637 (Bankr. N.D. Ala. 1985)). Therefore, this Court may recognize the control exerted by Rubicon and Crestview even given the absence of a statutory standard for control.
4. Burns was merely Rubicon and Crestview’s instrument used tocontrol the Debtor.
Burns, the CRO from January of 2007 until May of 2008, resigned long before the Debtor’s bankruptcy petition was filed. [Finding of Fact Nos. 23, 41.] This fact alone should foreclose his eligibility to serve as the designee under Bankruptcy Rule 9001(5). However, this Court also notes that — contrary to what Rubicon and Crestview would have this Court believe — Burns never independently had actual control over the Debtor; but rather, the evidence shows that he not only served at the pleasure of Rubicon and Crestview, but also that he was used as their instrument to control the Debtor.
Burns’s title of CRO should not be given undue weight. In In re King Brand Food Products, Inc., a letter granting “possession and control” as well as the actual “keys to the business premises” were insufficient to find control. 52 B.R. at 110. In In re Muy Bueno, the court saw through an individual who was only superficially appointed to represent the company, finding that the actual individual in control must serve as the designee under Bankruptcy Rule 9001(5). 257 B.R. at 845.
Similarly, in this case, Burns’s installation as CRO was fabricated in order to allow Rubicon and Crestview to exercise
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actual control over the Debtor. First, Burns was approved to serve as CRO by a Board of Directors that was hand-picked by Rubicon and Crestview. [Finding of Fact No. 23.] Indeed, Rubicon and Crestview’s counsel for several years, Greenberg Traurig, recommended Burns for the position; Greenberg Traurig’s clients doubtlessly knew that Burns would act in the manner
expected and desired. [Finding of Fact No. 28.] Finally, Burns’s compensation was funded by Rubicon and Crestview from the loan disbursed by those two entities in January of 2007. [Finding of Fact No. 25.]
In addition, Rubicon and Crestview directed Burns’s actions at the Debtor. His tenure as CRO coincided with the execution of the amended Stockholders Agreement, which granted significantly greater power to Rubicon and Crestview. [Finding of Fact No. 24.] Additionally, Burns acted at the behest of Rubicon and Crestview’s hand-picked Board of Directors. [Finding of Fact No. 31.]
Finally, Rubicon and Crestview were involved with the specific details of the Debtor’s operations, beyond that of ordinary shareholders. For example, Rubicon and Crestview were involved with the discussion over the revised budget and action plan for the Debtor, [Finding of Fact No. 34.], duties that would normally fall solely to the CRO and the Board. Further, Rubicon and Crestview closely monitored Burns’s work, going so far as requiring him to forward emails to them. [Finding of Fact Nos. 33, 34, 36.] For all of these reasons, Burns, although a CRO in name, was more of a minion for Rubicon and Crestview, and therefore should not be appointed the Debtor’s representative.
V. THE TRUSTEE’S REQUEST TO APPOINT BOTH RUBICON AND CRESTVIEW
The Trustee has requested this Court to designate both Rubicon and Crestview as the joint representatives of the Debtor. This, the Court will not do. Once again, this Court focuses on the plain meaning of the language of Bankruptcy Rule 9001(5). Bankruptcy Rule 9001(5) expressly sets forth that this Court may designate “a controlling stockholder,” not controlling stockholders. Because Bankruptcy Rule 9001(5) allows this Court to designate one — and only one — controlling stockholder, this Court may designate either Rubicon or Crestview — but not both. Therefore, as this Court finds that Rubicon was initially involved with the Debtor and holds a greater percentage of stock than
Crestview, [Finding of Fact No. 9], this Court designates Rubicon as the Debtor’s representative. 15 U.S.C. § 80a-2(a)(9) (presuming control by “any person who owns . . . more than 25 per centum of the voting securities of a company”).
VI. THE APPOINTMENT OF A SPECIFIC INDIVIDUAL AT RUBICON TO,AMONG OTHER THINGS, SIGN THE SCHEDULES AND STATEMENT OF FINANCIALAFFAIRS, TO TESTIFY AT THE MEETING OF CREDITORS, AND TO BE THEDEBTOR’S REPRESENTATIVE THEREAFTER
The final question is whether this Court has the power to appoint a specific individual within Rubicon to serve as the Debtor’s representative. This Court agrees with In re Muy Bueno, Corp., which noted that the Code “says nothing about which human being” must be designated within a corporation, and that “it is the court that selects the appropriate representative . . . not the corporate debtor,” and finally that Bankruptcy Rule 9001(5) “certainly does not give the debtor the right to designate as agent someone who knows little or nothing about the debtor’s recent affairs and activities.” 257 B.R. at 847-48 (citing In re Gaslight Club, Inc., 782 F.2d 767, 771 (7th
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Cir. 1986)). Additionally, this Court has the power under the Code to “issue any order . . . necessary or appropriate to carry out the provisions of this title.”11 U.S.C. § 105(a). This power may be used to ensure that “a result that the Code clearly required” is achieved. Perez v. Peake, 373 B.R. 468, 488 (S.D. Tex. 2007) (citing Marrama v. Citizens Bank of Mass., 549 U.S. 365, 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007)). The Code requires the Debtor’s representative to appear at meetings of the creditors under 11 U.S.C. §§ 341 343 in order to obtain the most accurate information possible from the Debtor’s representative. See In re Moore, 309 B.R. 725, 726 (Bankr. N.D. Tex. 2002) (noting that the meeting allows creditors to “rigorously question the debtor” and provide “valuable information regarding the debtor’s financial situation”); In re Shulund, 210 F. Supp. 195, 197
(D.C. Mont. 1962) (acknowledging that a function of the examination at the creditors meeting is to “locate and protect the assets of the bankrupt’s estate”); In
re E. Utils. Investing Corp., 98 F.2d 620, 622 (3d Cir. 1938) (recognizing that the purpose is to “afford . . . full information in connection [with the estate] . . . in order that the necessary steps may be taken for its preservation”).
Therefore, because Bankruptcy Rule 9001(5) requires a designee with full and material information, and to ensure that Rubicon does not further attempt to evade disclosure of information necessary to the Trustee’s investigation — i.e. to ensure that the necessary disclosure required by the Bankruptcy Code is achieved — this Court designates Leitch, a partner with Rubicon, to serve as the representative of the Debtor. Leitch signed the original resolution in December of 2005 allowing additional stock certificates to issue and be sold, and this action led to the involvement of Crestview and the other shareholders with the Debtor. [Finding of Fact No. 9] Leitch also signed the General Release Agreement and Settlement Agreement after McCormick and Chandler resigned. [Finding of Fact Nos. 23 24.] These agreements not only detailed the resignations of the former President and CEO of the Debtor, but also dictated the future structure of the Debtor, and provided Rubicon and Crestview with authority to appoint the entire board of the Debtor. Leitch’s long ties to the Debtor and his direct involvement with some of the most consequential decisions involving the Debtor place him in the position of the individual at Rubicon best able to serve as the Debtor’s representative.
In the alternative, if Leitch is no longer at Rubicon and is therefore unable to serve as the Debtor’s representative, then the Court designates Crestview, and specifically Flink, as the Debtor’s representative. While Crestview holds less stock than Rubicon, it still holds twenty-five percent of the total stock in the Debtor, which is a significantly greater share than any other shareholder; therefore, Crestview may be deemed a controlling shareholder. See McGhee v. Joutras, 908 F. Supp 566, 569
(N.D. Ill. 1995) (acknowledging a controlling shareholder holding twenty-five percent of
stock of a company); 15 U.S.C. § 80a-2(a)(9). Crestview, like Rubicon, was involved in key decisions throughout the Debtor’s existence and among the individuals at Crestview involved with this corporation, Flink is the most knowledgeable about the Debtor’s affairs. Flink was directly involved with the amendments to the Stockholders Agreement and the directions given to Hendrix. [Finding of Fact Nos. 16 17.] Additionally, Flink was often copied on emails discussing the day-to-day minutiae concerning the Debtor, which reflects his significant level of involvement and thus
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extensive knowledge about the Debtor. [Finding of Fact Nos. 22 36.] Because of these circumstances, the Court is confident that if Leitch is unable to serve, Flink can ably take his place.
Finally, it appears that Rubicon and Crestview hired Burns to prepare proposed Schedules and Statement of Financial Affairs in the hope of convincing this Court to appoint Burns as the Debtor’s representative. [Finding of Fact Nos. 54 55.] Their trial strategy will not work. This Court will not appoint Burns for the reasons stated herein. The Court rotes that in his closing arguments, counsel for the Trustee, after arguing for this Court to designate Rubicon and Crestview as the representative of the Debtor, stated that if the Court made such a designation, the Trustee would not object to these two companies then putting Burns on their payroll so that he could testify at the meeting of creditors. The Court expressly rejects this approach. The Court directs Leitch or, alternatively, Flink, to testify at the meeting of creditors and serve as the Debtor’s representative in every other respect. Burns departed from the scene four months prior to the filing of the petition, and this Court believes that he should not return to the stage. Leitch, and, in the alternative, Flink — unlike Burns — have access to documents vital to the investigation of the Debtor’s affairs as well as superior knowledge of the Debtor since its inception, and are already employed by Rubicon and Crestview.
In the first instance, this Court holds that the plain meaning of Bankruptcy Rule 9001(5) requires it to designate a “person” having ties to the Debtor as of the petition date from within the categories found in Bankruptcy Rule 9001(5). Because Rubicon and Crestview were the Debtor’s controlling shareholders on the filing date, this Court may designate one of them, but not someone like Burns, who does not fall within any of Bankruptcy Rule 9001(5)’s enumerated categories nor had any ties to the Debtor on the date of the filing of the bankruptcy petition.
Alternatively, even if this Court is not confined to applying Bankruptcy Rule 9001(5) on the petition date, and may also focus on pre-petition activities and the “persons” who were involved in these activities, this Court nevertheless holds that Rubicon or Crestview should be designated as the Debtor’s representative. The record reflects that Rubicon and Crestview each have substantial knowledge about the Debtor’s pre-petition affairs in general and the pre-petition sale of its assets in particular. [Finding of Fact Nos. 33 59.] The record also reflects that Rubicon and Crestview exercised extensive control over the Debtor’s affairs — ranging from forcing the resignation of its original officers, to hand-picking all the members of the board, to orchestrating the sale of the company’s assets, to directing how the proceeds of the sale were distributed, including certain distributions to themselves and their law firm, Greenberg Traurig. [Finding of Fact No. 58.] If these actions do not constitute control, then nothing does.
Moreover, even if Burns did have some control over the Debtor’s affairs during his tenure as CRO, the amount of his control does not surpass the control possessed by Rubicon and Crestview. To the extent that control of a company involves working up action plans and budgets — which Burns clearly was doing — such control does not amount to much when there are no employees to carry out
those plans or meet those budgets. [Finding of Fact No. 32.] Indeed, Burns’s control, to the extent he had any, is dwarfed by the control exercised by Rubicon and Crestview. While he was writing up action plans for a company
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with no operations, Rubicon and Crestview were orchestrating the sale of substantially all of the Debtor’s tangible assets and the distribution of the sale proceeds therefrom. [Finding of Fact Nos. 45 48.] Under these circumstances, where there is more than one “person” who was exercising control prior to the filing of the petition, the Court, pursuant to Bankruptcy Rule 9001(5), has the discretion to designate which of these controlling “persons” should serve as the representative of the debtor. This Court concludes that both Rubicon and Crestview had substantially more pre-petition control than Burns over the Debtor and that it would be inappropriate to designate Burns as the Debtor’s representative.
Finally, Rubicon and Crestview depict Burns as independent when in fact he was nothing more than their “bagman.” Burns was appointed by a board whose members were hand-picked by Rubicon and Crestview, who in turn had obtained Burns’s name from Greenberg Traurig — which had represented Rubicon and Crestview for years. Burns was the ultimate minion for Rubicon and Crestview right up to the point when he “un-resigned” for an instant in order to sign a power of attorney for Kern (SRR’s President) to execute the documents necessary to effectuate the sale of the Debtor’s assets. [Finding of Fact No. 42.] If either Rubicon or Crestview are designated to serve as the Debtor’s representative, they will have a duty to honestly disclose information Burns does not have, to wit: the negotiations over the sale price of $13.15 million, why the sale proceeds were distributed in the manner that they were, and who determined which unsecured creditors — such as Greenberg Traurig — would be paid and which unsecured creditors would not. This Court understands the desire of Rubicon and Crestview to avoid having to answer for these questionable payments to
unsecured creditors, but this Court will not risk undermining the integrity of the bankruptcy process. Therefore, this Court exercises its discretion under Bankruptcy Rule 9001(5) and holds that in the first instance, Rubicon must serve as the representative of the Debtor and Leitch must be the individual from Rubicon who takes the actions necessary to fulfill Rubicon’s duty as the Debtor’s representative. Alternatively, if Leitch is no longer at Rubicon, then Crestview must serve as the representative of the Debtor and Flink must be the individual from Crestview who takes the actions necessary to fulfill Crestview’s duty as the Debtor’s representative.
For the foregoing reasons, the Motion is granted in part and denied in part, insofar as the Court is appointing only one of the shareholders, but not both; and the Objection is overruled in its entirety. An order consistent with this Memorandum Opinion will be entered on the docket simultaneously with the entry of this Memorandum Opinion.
(Del. Ch. 1963) (holding that “[s]ecurities of other corporations may, of course, be acquired by a Delaware corporation”).
(Bankr. W.D. Tex. 1988).