UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK -------------------------------------------------------x : In re : : LEHMAN BROTHERS HOLDINGS, INC., : et al.,: : Debtors. : : -------------------------------------------------------x Chapter 11 Case No. 08-13555 (JMP) (Jointly Administered)
OBJECTION OF THE UNITED STATES TRUSTEE TO AMENDED MOTION FOR APPOINTMENT OF EQUITY COMMITTEE
TO: THE HONORABLE JAMES M. PECK, UNITED STATES BANKRUPTCY JUDGE:
Diana G. Adams, the United States Trustee for Region 2, in furtherance of the duties and
responsibilities set forth in 28 U.S.C. §§ 586(a)(3) and (5), hereby files her objections to the
Amended Motion for Appointment of Equity Committee (the “Motion,” Docket No. 293), filed
by Greg Georgas (the “Proponent”).
I. SUMMARY STATEMENT
The Motion should be denied because the Proponent has not shown that the appointment
of an official equity committee is warranted at this time. The Motion is premised largely upon a
September 10, 2008 Press Release issued by Lehman Brothers Holdings, Inc. (“Lehman Bros.”).
Even though the actual Press Release is not annexed to the Motion, the Court is asked to
conclude from a summary of the Press Release provided in the Motion that there was $28.4
billion of shareholder equity in Lehman Bros. on the date of the pre-petition Press Release, and
that this justifies the appointment of an equity committee.
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Reliance upon information from a Press Release is not sufficient to demonstrate that there
is an economic interest to be protected. Moreover, the Proponent has not demonstrated that the
appointment of an official equity committee is necessary to adequately represent equity security
holders’ interests at this time.
For the foregoing reasons, the United States Trustee, in the exercise of her discretion
under 11 U.S.C. § 1102(a)(1), has declined to appoint an equity committee at this time, and
believes the Motion should be denied.
II. BACKGROUND
1. On September 15, 2008 (the “Petition Date”), Lehman Bros. commenced in this
Court a voluntary case under chapter 11 of title 11 of the United States Code (the “Bankruptcy
Code”). Since that time, certain of its direct and indirect subsidiaries (collectively with Lehman
Bros., the “Debtors”) also have filed voluntary petitions for relief. In addition, on September 19,
2008, a proceeding was commenced under the Securities Investor Protection Act of 1970
(“SIPA”) regarding Lehman Brothers Inc., a subsidiary of Lehman Bros. (“LBI”). Under SIPA,
James W. Giddens has been appointed as trustee in the SIPA proceeding, and is administering
LBI’s estate.
2. The Debtors’ chapter 11 cases have been consolidated for procedural purposes
only, and are being jointly administered under Federal Rule of Bankruptcy Procedure 1015(b)
pursuant to an order of the Court entered September 17, 2008. Docket No. 86.
3. The Debtors are authorized to operate their businesses and manage their properties
as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code.
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4. On September 17, 2008, the United States Trustee appointed an official
committee of unsecured creditors pursuant to section 1102 of the Bankruptcy Code (the
“Creditors’ Committee”). Docket No. 62.
5. According to Item No. 1 of Exhibit “A” to the Voluntary Petition of Lehman
Bros.:
1. The following consolidated financial data is the latest available information and refers to the Debtor’s condition as of May 31, 2008.
Total assets $ 639 billion Total debts $ 613 billion.
Voluntary Petition, Exhibit A, Docket No. 1., ¶ 1, at 1 (note omitted).
6. Item No. 1 of Exhibit “A” to the Voluntary Petition of Lehman Bros. provides
further, as follows:
b. Number of shares of preferred stock
1) 5.94% Cumulative Preferred Stock, Series C: up to 5.0 million 2) 5.67% Cumulative Preferred Stock, Series D: up to 4.0 million 3) 6.50% Cumulative Preferred Stock, Series F: up to 12.0 million 4) Floating Rate Convertible Preferred Stock, Series G: up to 5.2 million 5) 7.95% Non-Convertible Perpetual Preferred Stock, Series J: up to 66.0 million 6) 6.375% Preferred Securities, Series K: up to 12.0 million 7) 6.375% Preferred Securities, Series L: up to 12.0 million 8) 6.00% Preferred Securities, Series M: up to 16 million 9) 6.24% Preferred Securities, Series N: up to 8 million 10) 7.25% Non-Cumulative Perpetual Convertible Preferred Stock, Series P: up to 4.0 million 11) 8.75% Non-Cumulative Mandatory Convertible Preferred Stock, Series Q: up to 2.0 million
c. Number of shares of common stock 694,401,926 (outstanding). (Note 1: This number is as of June 30, 2008.)
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7. On September 22, 2008, the Proponent filed his Amended Motion for
Appointment of Equity Committee (Docket No. 293). The text of the Motion spans two pages,
and its representations rely largely on a press release issued by Lehman Bros. on September 10,
2008, entitled “Preliminary Third Quarter 2008 Financial Results” (the “Sept. 10 Press Release”).
See id.
8. By letter dated October 7, 2008 – i.e. two weeks after the Motion was filed – the
Proponent requested that the United States Trustee appoint an official committee of equity
security holders.
9. By letter dated October 9, 2008, the United States Trustee advised the Proponent
that, for the reasons set forth in this objection, she was declining to appoint an equity committee
at this time.
10. The request for an equity committee made by the Proponent constitutes the only
such request received by the Office of the United States Trustee.
III. DISCUSSION
Under Bankruptcy Code § 1102(a)(2), the Court has the discretion to order the
appointment of an equity committee. Official Comm. v. Finova Group, Inc. (In re Finova Group,
Inc.), 383 B.R. 64, 70 (D. Del. 2008). Where such a committee is ordered, the Court is required
to find that the appointment of an equity committee is “necessary to assure adequate
representation of . . . equity security holders.” 11 U.S.C. § 1102(a)(2); In re Johns-Manville
Corp., 68 B.R. 155, 159 (S.D.N.Y. 1986). This hurdle has been described as a “high standard.”
In re Oneida, Ltd., 351 B.R. 79, 83 (Bankr. S.D.N.Y. 2006). The difficult threshold imposed by
the statute reflects the statutory policies implemented in Bankruptcy Code § 1141(d)(1)(B),
As set forth above, the Proponent requested in writing that the United States Trustee1 appoint an equity committee, but did so on October 7, 2008, i.e. well after the filing of the Motion. As set forth above, in response to the Proponent’s written request, which essentially sets forth the same arguments as the Motion, the United States Trustee declined to appoint an equity committee, and so notified the Proponent in writing on October 9, 2008.
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which provides that unless a plan of reorganization or confirmation order provide otherwise, the
confirmation of a reorganization plan by a bankruptcy court “terminates all rights and interests of
equity security holders [ ] provided for by the plan.” 11 U.S.C. § 1141(d)(1)(B).
Accordingly, the appointment of committees of equity security holders in chapter 11
cases is the “rare exception,” rather than the rule. In re Williams Commc’ns Group, Inc., 281
B.R. 216, 223 (Bankr. S.D.N.Y. 2002). The moving party bears the burden of establishing that
the tenets of section 1102(a) have been met. Id. (proponents must establish substantial likelihood
of meaningful recovery and inability to represent their interests without official committee).1
A. The Proponent Has Not Shown Inadequate Representation.
Section 1102(a)(2) does not set forth a test of adequate representation, so the Court must
examine the facts of each case. Johns-Manville, 68 B.R. at 159; see also In re Beker Indus.
Corp., 55 B.R. 945, 948 (Bankr. S.D.N.Y. 1985) (adequate representation is not defined in the
statute, but requires interpretation by the Court).
The Proponent, an individual, is the only person who has requested the appointment of an
equity committee. The United States Trustee has not received any calls or correspondence from
other equity holders requesting the appointment of an equity committee as of the date hereof; nor
does the docket reflect any filings made in support of the Motion. The Proponent and other
shareholders in the Lehman Bros. bankruptcy case are not statutorily disenfranchised from the
chapter 11 process. The law provides that equity holders have standing to be heard on any issue
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in the bankruptcy case. 11 U.S.C. § 1109(b)(2).
The “statutory focus of section 1102(a)(2) is not whether the shareholders are
‘exclusively’ represented, but whether they are ‘adequately’ represented.” Williams Commcn’s,
281 B.R. at 223. In this analysis, the bankruptcy courts consider a number of non-exclusive
factors in determining whether there is adequate representation, including the debtor’s
insolvency, the number of shareholders, the complexity of the case, and whether the cost of the
committee would significantly outweigh the concern for adequate representation. Johns-
Manville Corp., 68 B.R. at 159-60.
It is true that Lehman Bros. has a large number of shareholders, and it is conceded that
this relatively-new bankruptcy case has raised complex issues, and will continue raising them
during most of its pendency in this Court. But generally, “not every case with public share-
holders warrants an equity committee.” In re National R.V. Holdings, Inc., 390 B.R. 690, 698
(Bankr. C.D. Cal. 2008) (denying appointment of equity committee because insolvency not
proven). Specifically, “while there is a large number of shareholders, not every case with such a
large number will require an official equity committee.” Williams Commcn’s, 281 B.R. at 223.
When a corporate debtor remains in possession, as is the case here, its directors bear the
same fiduciary responsibilities to creditors and shareholders as would a bankruptcy trustee, if one
was appointed. “Indeed, the willingness of courts to leave debtors in possession ‘is premised
upon an assurance that the officers and managing employees can be depended upon to carry out
the fiduciary responsibilities of a trustee.’ ” Commodity Futures Trading Commission v.
Weintraub, 471 U.S. 343, 355 (1985) (citing Wolf v. Weinstein, 372 U.S. 633, 649-652 (1963)).
In this sense, the Proponent has neither alleged nor proven that the Debtor and its representatives
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have faltered in the exercise of their fiduciary duties to equity security holders.
The Proponent has failed to show that he is not adequately represented, and this failure
militates against the Court ordering the appointment of an equity committee at this time.
B. The Proponent Has Not Established that There is an Economic Interest to Protect.
Equity committees “should not be appointed unless equity holders establish that (i) there
is a substantial likelihood that they will receive a meaningful distribution in the case under a
strict application of the absolute priority rule.” Williams Commcn’s, 281 B.R. at 223. In this
regard, section 101(32) requires a “balance sheet test.” In re Nirvana Restaurant, Inc., 337 B.R.
495, 506 (Bankr. S.D.N.Y. 2006.) If the debtor is a going concern, fair valuation means “the fair
market value of the debtor’s assets that could be obtained if sold in a prudent manner within a
reasonable period of time to pay the debtor's debts.” Id., quoting Lawson v. Ford Motor Co. (In
re Roblin Indus., Inc.), 78 F.3d 30, 35 (2d Cir.1996).
The analysis starts with a review of the balance sheet, with the recognition that book
value does not always provide a fair estimate of market value. Nirvana, 337 B.R. at 506.
However, book values “may still support a court's inference of an entity's insolvency in some
circumstances.” In re Flutie New York Co., 310 B.R. 31, 52 (Bankr. S.D.N.Y. 2004) (quoting
Roblin Indus., 78 F.3d at 36. Other evidence of insolvency can be found in SEC filings and
accompanying financial statements, including (1) reports of negative net worth, (2) statements or
figures that show sustained losses; (3) facts that show that the debtor is operating in a depressed
market, and (4) reports of failure to pay bank debt. Roblin Indus., 78 F.3d at 37. However,
“whenever possible, a determination of insolvency should be based on reasonable appraisals or
expert testimony.” Id., at 38.
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The Proponent has fallen short of meeting his burden of establishing “a substantial
likelihood” that there will be a “meaningful distribution” to equity. Williams Commcn’s, 281
B.R. at 223. According to Exhibit “A” to the Voluntary Petition of Lehman Bros., the latest
available information as of the Petition Date was that Lehman Bros.’ total assets were $639
billion and its total liabilities were $613 billion as of May 31, 2008. Voluntary Petition, Exh. A,
Docket No. 1. However, these figures were based on calculations made more than three months
prior to the Commencement Date. Thus, they reflect a financial performance that has likely
changed with the volatility of the global financial markets during the intervening time frame.
Moreover, updated public information with respect to the Debtors’ solvency, such as their
bankruptcy schedules and regulatory filings for the third and fourth fiscal quarters of 2008, is not
yet available.
Thus, as the Proponent has not established, and perhaps at this time cannot establish, that
there is an economic interest to protect from the perspective of equity, the appointment of an
equity committee is not warranted at this time.
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