DECISION WITHOUT PUBLISHED OPINION
Affirmed.
tributions under a plan. In addition,
ACC Bondholders Group v. Adelphia Commc'ns Corp. (In re Adelphia Commc'ns Corp.),
361 B.R. 337 (S.D.N.Y. 2007) is plainly inapposite; the plan itself involved different treatment depending on whether the creditor voted to accept or reject the plan.
Id. at 362-64.
In re CGE Shattuck, LLC,
254 B.R. 5 (Bankr. D.N.H. 2000) presented an unusual twist on "gift" plans. The secured creditor (NCC) proposed a competing plan that included a separate commitment to make extra payments to certain designated unsecured creditors from its collateral.
Id. at 8. It subsequently withdrew the plan, but not the separate commitment, which it made dependent on the granting of relief from the automatic stay or the conversion of the case to chapter 7.
Id. NCC sought to include a disclosure about its commitment with the solicitation materials sent by the debtor and the co-proponent of the debtor's plan. The bankruptcy court refused to sanction the proposed disclosure, ruling that the commitment was a proxy for the withdrawn NCC plan and was designed to circumvent the protections of the chapter 11 plan process, including the equal treatment of creditors under § 1123(a)(4).
Id. at 12-13.
The Pfizer Settlement Agreements are not
de facto plans but private settlements between Pfizer and groups of asbestos claimants. If Pfizer had not made the Second Payment dependent on the confirmation of a Quigley plan, and even if the Settling Claimants had released Quigley, the Pfizer Settlement Agreements would nevertheless have caused the same "unequal treatment" of which the AHC complains; the Settling Claimants are receiving more from Pfizer than the Non-Settling Claimants are receiving under the Fourth Plan. But creditors frequently enter into settlements with co-obligors, and, in the end, may receive more than similarly situated creditors under a plan. Absent bad faith, vote manipulation, or similar wrongful conduct, these settlements do not violate the confirmation requirements.
Second, the AHC contends that the Non-Settling Claimants are being forced to pay greater consideration for their 7.5% distribution. Here, the AHC stands on firmer ground. In Quigley II, I noted that the Pfizer direct claims might have value,Quigley II, 377 B.R. at 118, and expressed a reluctance to review the merits or value of the Pfizer direct claims that the Settling Claimants had released but the Non-Settling Claimants were keeping. Id. at 118-19.
The evidence at trial indicated that the Pfizer direct claims had little if any value — the vast majority of the asbestos claims are based on the exposure to Quigley products. Furthermore, the derivative claims have substantial value. Hence, the Non-Settling Claimants as a group are being compelled to give up their valuable derivative claims — which the Settling Claimants have already surrendered — to get the same 7.5% distribution.
This conclusion is simply the flipside of the earlier conclusion that the Fourth Plan violates the "best interest" test. The latter measured the "retention" value of the derivative claims in a hypothetical Quigley chapter 7. The "equal treatment" standard measures the value of the same derivative claim as the price of participation in the distribution from the Trust. Just as the retention of the derivative claim in a Quigley chapter 7 results in the violation of the "best interest" test, the compelled surrender of the derivative claim in a Quigley chapter 11 results in "unequal treatment" under 11 U.S.C. § 1123(a)(4).
F. Remaining Motions 1. Shaked's Testimony and Report
The Shaked Report, dated Apr. 15, 2009, addressed three principal areas: the value of Pfizer's contribution under the Fourth Plan, the amount of Pfizer's potential claim relief, and Quigley's liquidation value. Quigley's expert, Thomas Britven, also submitted an expert report on April 15, 2009, and in response, Shaked submitted a rebuttal report on May 7, 2009 (the "Rebuttal Report").
Quigley subsequently filed updated financial statements on September 3, 2009, (J47a), and an updated liquidation analysis on September 11, 2009 (J47b). By this time, discovery had closed. According to Quigley, the parties reopened discovery, and the AHC deposed three witnesses (Berland, Jenkins and Douglas Charboneau, Quigley's controller and the draftsman of the updated financial statements) on September 15, 2010. (See Reply of Quigley Company, Inc. to Objection of Ad Hoc Committee of Tort Lawyers to Motion for Order Under Fed R. Bankr. P. 7026(e)(1) and (2), 7037(c)(1), 9014(c), and FRE 802 Partially Excluding Testimony, Illustrative Exhibits, and Expert Report of Doctor Israel Shaked, dated Jan. 26, 2010, at ¶ 18 n. 3) (ECF Doc. # 2029).) Britven thereafter filed a supplemental report on September 21, 2009 to reflect the updated information published on September 3, 2009.
Shaked did not file an updated report. During the trial, he nevertheless gave expert testimony, over Quigley's objection, which incorporated and relied on the updated financial information. During his testimony, he used illustrative slides that also incorporated the new financial information. One day after Shaked completed his testimony, the AHC moved into evidence Shaked's slides, the Shaked Report and the Rebuttal Report. (Tr. 2831:12-16.) Quigley again objected. The Court admitted the evidence subject to Quigley's post-trial briefing of the objection, (Tr. at 2549:22-2550:2, 2554:8-10; 2833:13-20), and Quigley followed up with a post-trial motion to exclude specific portions of Shaked's testimony, slides and reports. See Motion of Quigley Company, Inc. for Order Under Fed.R.Bankr.P. 7026(e)(1) and (2), 7037(c)(1), 9014(c), and FRE 802 Partially Excluding Testimony, Illustrative Exhibits, and Expert Report of Doctor Israel Shaked, dated Jan. 5, 2010 ("Exclusion Motion"). (ECF Doc # 2024.)
Quigley's objection centered on two arguments. First, the portions of Shaked's testimony and slides that focused on the updated financial information were inadmissible under Rules 7026(e)(1) and (2), 7037(c)(1) and 9014(c) of the Federal Rules of Bankruptcy Procedure because the AHC had failed to supplement Shaked's reports to reflect his new testimony. Quigley identified several objectionable portions of his testimony, (see Exclusion Motion at ¶¶ 8-9), which fell into three general categories: (1) Reorganized Quigley would not be viable, notwithstanding the Pfizer Claims Services Agreement; (2) Reorganized Quigley would not be able to attract new business; and (3) as of the Effective Date, the value of Reorganized Quigley's stock would be $3.8 million rather than his previous estimate of approximately $6.6 million.
Tr. 2543:18-20, 2544:10-2545:14, 2553:14-18, 21-2554:2, 2554:14-2555:4, 2555:13-2556:23, 2557:10-13, 2562:25-2564:5, 2565:12-2567:10, 2569:4-11, 2569:20-2570:7, 2620:8-2621:4, 2642:16-2643:13; Shaked Slides at 6-8, 10-14A, 16, 26.
Second, the portions of the Shaked Report that contained his liquidation analysis, (Shaked Report at 19-20, 100), were inadmissible hearsay under Rule 802 Federal Rule of Evidence; Shaked had failed to testify regarding his liquidation analysis at the trial. Furthermore, because the AHC sought to introduce it a day after Shaked left the stand, Quigley argued that it was unfairly denied the chance to cross-examine him as to its contents.
a. New Information
Bankruptcy Rule 7026 makes Rule 26 of the Federal Rules of Civil Procedure applicable in adversary proceedings, and Bankruptcy Rule 9014(c) makes Bankruptcy Rule 7026 applicable in contested matters. Rule 26(e)(1)(A) of the Federal Rules of Civil Procedure requires a party to supplement a disclosure "in a timely manner if the party learns that in some material respect the [report] is incomplete or incorrect, and if the additional or corrective information has not otherwise been made known to the other parties during the discovery process or in writing." Rule 26(e)(2), which applies to expert witnesses, provides that "the party's duty to supplement extends both to information included in the report and to information given during the expert's deposition" and "[a]ny additions or changes to this information must be disclosed by the time the party's pretrial disclosures under Rule 26(a)(3) are due." Under Rule 37, which is made applicable to this contested matter through Rules 7037 and 9014(c) of the Federal Rules of Bankruptcy Procedure, "[i]f a party fails to provide information or identify a witness as required by Rule 26(a) or (e), the party is not allowed to use that information or witness to supply evidence . . . at a hearing, or at trial, unless the failure was substantially justified or is harmless."
Rule 26(e)(1(A), the general provision governing supplementation, does not apply. The updated financial information was prepared by Charboneau and known to Quigley. See 6 JAMES WM. MOORE, MOORE'S FEDERAL PRACTICE § 26.131[1], at 26-580 (3rd ed. 2010). Nevertheless, the AHC should have supplemented Shaked's reports under Rule 26(e)(2) to include the updated financial information he relied on in forming the opinions to which he testified at trial. The updated financial information changed the information in Shaked's reports, and altered his expert opinion. Furthermore, although discovery had closed before the updated financial information was issued, the parties reopened discovery by mutual consent to permit inquiry into the new information.
The AHC's reliance on Highland Capital Management, L.P. v. Schneider, 551 F. Supp. 2d 173 (S.D.N.Y. 2008) is misplaced. It cited to the portion of the opinion that discussed the duty to supplement witness lists and not expert reports, as its parenthetical suggests.
It does not follow, however, that the testimony and related evidence should be excluded under Rule 37. When considering whether to exclude the evidence under Rule 37, the Court must weigh four factors: "(1) the party's explanation for the failure to comply . . ., (2) the importance of the testimony of the precluded witness, (3) the prejudice suffered by the opposing party . . .; and (4) the possibility of a continuance." Softel, Inc. v. Dragon Medical and Scientific Communications, Inc., 118 F.3d 955, 961 (2d Cir. 1997); accord Outley v. City of New York, 837 F.2d 587, 590 (2d Cir. 1988).
Here, the AHC did not provide a satisfactory explanation for Shaked's failure to update his reports. The updated financial information was issued in September 2009, and Shaked testified in December. Moreover, Britven was able to supplement his report. This factor favors exclusion. On the other hand, neither side suggested the need for a continuance. In any event, the admission of Shaked's testimony did not prejudice Quigley, and was harmless, for the simple reason that Shaked's objectionable testimony was not accorded any weight by the Court. Although the Court concluded that Reorganized Quigley would not be viable after the termination of the Pfizer Claims Services Agreement, the conclusion was not based on Shaked's testimony. Rather, the Court relied on Britven's acknowledgment that Quigley could not survive without additional business and rejected Quigley's evidence, primarily Jenkins prediction, that Quigley would attract new business once the specter of bankruptcy was removed. Shaked was not an expert in the claims handling business, and the Court stated at trial that his testimony regarding Quigley's inability to attract new business was not entitled to any weight. (Tr. 2562:8-21.) Finally, the Court rejected Shaked's $3.8 million valuation of Quigley's common stock. Accordingly, the motion to strike Shaked's testimony and corresponding slides is denied.
b. Shaked's Liquidation Analysis
I reach a different conclusion with regard to Shaked's liquidation analysis. Although included in his initial report, he did not testify about it, and the AHC deprived Quigley of the opportunity to cross-examine Shaked on this point. As a rule, expert reports are hearsay. Ake v. General Motors Corp., 942 F. Supp. 869, 878 (W.D.N.Y. 1996); Granite Partners, L.P. v. Merrill Lynch, Pierce, Fenner Smith, Inc., No. 96 Civ. 7874 (RWS), 2002 WL 826956, at *7 (S.D.N.Y. May 1, 2002). Nevertheless, Quigley only seeks to exclude the liquidation analysis in the Shaked Report, and the AHC's belated request for admission was prejudicial. Quigley raised the substance of this objection when the report was offered although it did not utter the word "hearsay," (see Tr. 2831:12-2833:17), and properly preserved it.
Furthermore, NAACP v. A.A. Arms, Inc., No. 99-CV-3999 (JBW), 2003 WL 2003750 (E.D.N.Y. April 4, 2003) is not to the contrary. There, the parties moved in limine to exclude certain expert reports. The movants contended that the experts were scheduled to testify at trial, and the reports would be redundant. Id. 2003 WL 2003750 at * 1. Judge Weinstein questioned the position apparently taken by the movants the reports were inadmissible hearsay in light of Rules 702 and 703 of the Federal Rules of Evidence. In addition, Judge Weinstein distinguished the cases cited by the movants on the grounds that they were decided before the 2000 amendments to these rules and the courts excluded the reports because the experts were scheduled to testify. Id. Judge Weinstein ultimately concluded that it could not rule out an expert report it had not yet seen, observing that the "[r]ulings will have to be made on a report by report basis as requested by the parties." Id.
Here, the motion is not one in limine that asks the Court to speculate on the contents of the Shaked Report or its redundancy. The portion of the report that Quigley seeks to exclude is not redundant because Shaked never testified about his liquidation analysis. Although the report might have proved helpful to the Court had he done so, it is unfair to credit Shaked's liquidation analysis under the circumstances. Accordingly, this part of Quigley's Exclusion Motion is granted.
Even if the liquidation analysis were not excluded, it would not be entitled to weight. Shaked ascribe a liquidation value of roughly $4.2 million to the claims that the Non-Settling Claimants and Futures would retain against Pfizer. In other words, he assumed that Pfizer is 100% liable for Quigley's products. As discussed in the preceding text, the Court valued Pfizer's liability at 23% of the historic settlement value of the asbestos claims.
2. The Sealing Motion
During the confirmation hearing, the Pfizer Settlement Agreements were received in evidence. Many contained the type of personal identifying information about the claimants that would be subject to redaction under Federal Bankruptcy Rule 9037 if filed with the Court. The Court directed the redaction of that information. Other information allowed the reader to ascertain how much a Settling Law Firm received in settlement for each claimant with a specific impairment. For example, one could tell by examining the Pfizer Settlement Agreements that Settling Law Firm A settled its mesothelioma cases for $100,000 each while Settling Law Firm B settled its mesothelioma cases for $200,000 each. A particular agreement might also show that a Settling Law Firm settled the same impairment for different amounts, depending on the jurisdiction where the claimant resided.
Baron Budd, P.C., a Settling Law Firm, filed the Sealing Motion at the conclusion of the trial, and other Settling Law Firms joined in or filed their own motions. They contend that the Pfizer Settlement Agreements, as well as certain testimony derived from the information in those agreements, contain "confidential settlement information reflecting the settlement practices of Counsel for Tort Claimants and Pfizer, such as the settlement amounts for individual claimants." (Sealing Motion ¶ 4.) They maintain that the information is proprietary, (id.), and "[t]he release of the terms of the Settlement Agreements to the public potentially could prejudice Counsel for Tort Claimants' ongoing litigation and settlement discussions with other defendants." (Id. ¶ 7.) In addition, two firms argue that the settlement information is inadmissible under Rule 408 of the Federal Rules of Evidence. (Motion to Exclude Settlement Information of Maritime Claimants Settlement Agreements, dated Dec. 21, 2009 (ECF Doc. # 1991); Objection to Presentation of Settlement Information by Clients of the Law Offices of Peter T Nicholl, filed Dec. 23, 2009) (ECF Doc. # 1996).) The United States Trustee and the AHC oppose the motions.
Rule 408 (Compromise and Offers of Compromise) provides:
(a) Prohibited uses. — Evidence of the following is not admissible on behalf of any party, when offered to prove liability for, invalidity of, or amount of a claim that was disputed as to validity or amount, or to impeach through a prior inconsistent statement or contradiction:
(1) furnishing or offering or promising to furnish — or accepting or offering or promising to accept — a valuable consideration in compromising or attempting to compromise the claim; and
(2) conduct or statements made in compromise negotiations regarding the claim, except when offered in a criminal case and the negotiations related to a claim by a public office or agency in the exercise of regulatory, investigative, or enforcement authority.
(b) Permitted uses. — This rule does not require exclusion if the evidence is offered for purposes not prohibited by subdivision (a). Examples of permissible purposes include proving a witness's bias or prejudice; negating a contention of undue delay; and proving an effort to obstruct a criminal investigation or prosecution.
See Objection of the United States Trustee to Motions to Seal Certain Settlement Agreements, dated Jan. 13, 2010 (ECF Doc. # 2014); Omnibus Objection of the Ad Hoc Committee of Tort Victims to (I) Motion to Exclude Settlement Information of Maritime Claimants Settlement Agreements, (II) Motion of Baron Budd, P.C. Pursuant to Section 107 of the Bankruptcy Code and Federal Rule of Bankruptcy Procedure 9018 to Seal Certain Settlement Agreements, and (III) Objection to Presentation of Settlement Information By the Clients of the Law Offices of Peter T. Nicholl, dated Jan. 13, 2010 (ECF Doc. # 2015.)
Section 107(a) of the Bankruptcy Code provides that all papers "filed in a case under this title . . . are public records and open to examination" by the public. 11 U.S.C. § 107(a). "This policy of open inspection, codified generally in § 107(a) of the Bankruptcy Code, evidences congress's strong desire to preserve the public's right of access to judicial records in bankruptcy proceedings." Video Software Dealers Ass'n v. Orion Pictures Corp. (In re Orion Pictures Corp.), 21 F.3d 24, 26 (2d Cir. 2004); accord In re Silicon Graphics, Inc., Case no. 06-10977, 2009 Bankr. LEXIS 1350, at *6 (Bankr. S.D.N.Y. Apr. 24, 2009) In re Food Mgmt. Group, LLC, 359 B.R. 543, 553 (Bankr. S.D.N.Y. 2007). Nevertheless, a limited exception to public disclosure may be invoked to protect "an entity with respect to a trade secret or confidential research, development or commercial information." 11 U.S.C. § 107(b)(1); accord FED. R. BANKR. P. 9018. The "commercial information" exception protects parties from the release of information that could cause them harm or give competitors an unfair advantage. Orion Pictures, 21 F.3d at 27;In re Global Crossing Ltd., 295 B.R. 720, 725 (Bankr. S.D.N.Y. 2003). The moving party bears the burden of showing that the information is confidential.Food Mgmt. Group, 359 B.R. at 561; In re Fibermark, Inc., 330 B.R. 480 (Bankr. D. Vt. 2005)
The sealing movants contend, in substance, that they will be placed at a competitive disadvantage if future tort defendants discover how much they accepted from Pfizer to settle a particular impairment. They apparently fear that a future tort defendant will not offer $200,000 to settle a mesothelioma case if it knows that the Settling Law firm settled the same claim for $100,000 under the Pfizer Settlement Agreement. In other words, the Settling Law Firm will lose leverage in future cases.
A similar argument was raised in Geltzer v. Andersen Worldwide, S.C., No. 05 Civ. 3339 (GEL), 2007 WL 273526 (S.D.N.Y. Jan. 30, 2007). There, the chapter 7 trustee sued the defendants for professional malpractice and other torts. The trustee and the defendants eventually entered into a settlement agreement, and the trustee sought judicial approval of the settlement pursuant to Rule 9019(a) of the Federal Rules of Bankruptcy Procedure. The trustee's motion failed to disclose the amount of the settlement, contending that the information should remain confidential. According to the trustee, the defendants no longer engaged in the accounting profession — or any other profession. Their business consisted primarily of settling lawsuits brought against them, and the settlement amount related directly to the conduct of their business. Id. at 3.
The decision focused mainly on the Court's independent duty to judge the reasonableness of the settlement, but Judge Lynch also rejected the argument that the amount of the settlement was commercial information "in any normal sense of the words," id., or that the defendants' "bargaining position" was commercial information that had to be protected:
The only reason given by the Trustee for confidentiality is that "public disclosure of the Settlement Amount would enable other claimants against Andersen to determine how much Andersen is currently willing, and able, to pay in respect of the Trustee's claim, thereby potentially undercutting Andersen's negotiating leverage with such claimants." (Eiseman Decl. ¶ 19.) This is a wan excuse for impinging on the public's right of access to judicial documents. There is no discernable public interest, or interest of the bankruptcy estates, in preserving Andersen's "leverage" as against other parties who have sued it. Nor has the movant indicated any authority to support its implicit proposition that protecting the bargaining position of the defendant in other, unrelated cases, is even a proper consideration of a court being asked to approve a settlement in a given case.
Id. at 4;
accord In re Northwest Airlines Corp.,
363 B.R. 704, 708 n. 8 (Bankr. S.D.N.Y. 2007) (rejecting argument by
ad hoc committee of equity security holders that its members should be relieved of disclosure obligations required under Federal Bankruptcy Rule 2019 because disclosure would reveal their investment strategies and damage their bargaining positions).
The sealing movants' concern about leverage in future settlement negotiations is similarly unworthy of protection under § 107(b)(1). Their bargaining leverage in future unrelated cases is not "commercial information." Furthermore, their expressed concern over their bargaining power is speculative, but even if it were not, countervailing considerations dictate the need for disclosure. The Pfizer settlements were part of a strategy, conceived and executed in bad faith, to manipulate the vote in this case. The Settling Claimants, represented by the Settling Law Firms, were participants; they tendered their votes in exchange for the Second Payment. Thus, they knew or should have suspected that their settlements might become an issue in the anticipated bankruptcy case. The public has the right to know how much they were paid to vote in favor of the Quigley's plans.
Finally, I agree with the United States Trustee that any objection based on Federal Rule 408 has been waived. The joint pre-trial order was filed before the trial, and alerted all parties in interest that the Pfizer Settlement Agreements would be part of the trial record. All parties in interest were afforded ample opportunity to move in limine to exclude the settlements under Rule 408, or attend the trial and object when the agreements were offered into evidence. The two Settling Law Firms that are relying on Rule 408 failed to do either.
Accordingly, the Sealing Motion is denied.
3. The Street Employment Motion a. Background
The final issue to be addressed is the so-called Street Employment Motion. (See Motion Of Quigley Company, Inc. for Order under 11 U.S.C. §§ 105(a) and 363(b) Approving Supplement to Paul A. Street Employment Agreement, dated May 7, 2007 (J324.) The motion was subsequently withdrawn, and the procedural posture of the issues raise by the Street Employment Motion is unusual. Some background is helpful.
Quigley originally hired Street as its president and chairman of the board in May 2003, and entered into a written agreement with Street in May 2004. (Street Employment Agreement, Ex. B.) The agreement ran for one year, (id. § 3), and Street received an annual salary of $900,000. (Id. § 4.1.) Street agreed to "perform such duties as may be assigned to him from time to time by the Board of Directors of the Corporation [and to] devote such amount of his business time and efforts sufficient to perform his duties hereunder." (Id. at § 2.) He was not required to devote 100% of his time to Quigley. Street was a principal of Impala Partners LLC, and Quigley consented "to his performing services for Impala on matters unrelated to the affairs of [Quigley]." (Id. § 2.)
The original agreement was between Quigley and Impala Partners LLC, Street's company. (J220, Ex. A.) Subsequent agreements were directly between Quigley and Street.
The Quigley Board considered the employment agreement at its July 6, 2004 meeting. The meeting minutes reflect that the agreement was reviewed by Quigley's counsel and also addressed by Michael Cook, Esq., Quigley's retained bankruptcy counsel. (J225 at 2.) In addition, the minutes also reflect a discussion that Street had the right to participate in unrelated Impala Partners matters provided that they did not interfere or conflict with his duties as Quigley's president and chairman. (Id. at 1.) The Board approved the May 2004 agreement, with Street abstaining. (Id. at 2.)
The Board subsequently approved two post-petition supplements to Street's employment agreement at its April, 2005 and May, 2006 Board meetings. Each supplement extended the term of Street's employment for one year. Street abstained from both votes. (See J229 (April 18, 2005 Board meeting minutes), at 3; J231 (May 10, 2006 Board meeting minutes), at 3).) Quigley sought Court approval of the supplements, which the Court granted. No party, including the United States Trustee, objected to either the 2005 or 2006 supplements.
At its April 17, 2007 Board meeting, the Board considered an additional one year extension of Street's employment. Street had agreed to accept a 50% reduction in his salary, and "Raeburn suggested a renewal of Mr. Street's Employment Agreement on the same terms of the agreement currently in place between the Company and Mr. Street, subject to Mr. Street's voluntary reduction in compensation." (See J232 (April 17, 2007 Board meeting minutes) at 1.) "Following a full and thorough discussion, upon motion made and seconded, with Mr. Street abstaining," the Board passed a resolution approving the extension (the "2007 Supplement"). (Id. 2.) Except for the amount of compensation, the material provisions of the earlier agreements remained unchanged. (See Street Employment Motion, Ex. A.)
Quigley filed the Street Employment Motion, seeking approval of the 2007 Supplement, in May 2007. By then, the AHC and United States Trustee had sought a variety of relief, including the appointment of a chapter 11 petition and the conversion or dismissal of the case, and each objected for the first time to Street's continued employment. (See Objection of the United States Trustee to the Motion of the Debtor Under 11 U.S.C. §§ 105(a) and 363(b) Approving Supplement to Paul A. Street Employment Agreement, dated Sept. 24, 2007 (ECF Doc. # 1221); The Ad-Hoc Committee of Tort Victims Objection to Quigley Company, Inc.'s Motion for Order Extending Employment Agreement of Paul A. Street, dated Sept. 20, 2007 (ECF Doc. # 1223).) The various pending motions also triggered a new wave of discovery and discovery disputes.
In response, Quigley moved to dismiss the Street Employment Motion. (See Motion Of Quigley Company, Inc. for Order Under Federal Bankruptcy Rule 7041 to Dismiss Motion to Approve Supplement to Paul A. Street Employment Agreement, dated Nov. 1, 2007 (ECF Doc. # 1254).) Quigley argued that the issues raised by the pending United States Trustee and AHC motions, as well as the Street Employment Motion, overlapped with the confirmation issues and should be addressed as part of the contested confirmation hearing. Furthermore, the Street Employment Motion would be mooted by the appointment of a chapter 11 trustee. (Id. ¶¶ 16-19.)
The United States Trustee opposed Quigley's dismissal motion. (See Response of the United States Trustee to the Motion of the Debtor Under Bankruptcy Rule 7041 to Dismiss Motion to Approve Supplement to Paul A. Street Employment Agreement, dated Dec. 3, 2007 (ECF Doc. # 1283.) She expressed a concern that permitting Quigley to withdraw the motion would have the same effect as granting it; Street would continue to be employed by Quigley and receive compensation at the annual rate of $450,000. (Id. 1.) Instead, the Court should expedite the hearing on the Street Employment Motion, or alternatively, prohibit Street from receiving any compensation until the motion was considered. (Id. 1-2.) In other words, she had no objection to Street's continued service as an estate fiduciary as long as he did not get paid.
The Court conducted a hearing on December 6, 2007. The United States Trustee repeated her concern that Street continued to receive compensation in the face of unresolved objections, and wanted assurance that any excessive compensation would be subject to disgorgement. (Transcript of Hearing, Held Dec. 6, 2007, at 5 (ECF Doc. # 1301).) The Court observed that an excessive compensation claim belonged to the estate and could still be pursued. (Id. 6.) The Court questioned whether Street understood the risk of disgorgement, and Quigley's counsel responded that he did. (Id.) Satisfied with the preservation of the disgorgement claim, the United States Trustee withdrew her objection. (Id.) The Court subsequently signed an order dismissing the Street Employment Motion "without prejudice to any claims relating to Street's employment." (Order Granting Motion of Quigley Company, Inc. Under Fed.R.Bankr.P. 7041 to Dismiss Prior Motion for Order Approving Supplement to Paul A. Street Employment Agreement, dated Dec. 12, 2007 (ECF Doc. # 1301.)
The United States Trustee's post-confirmation hearing submission continues to press certain arguments relating to Street's employment and compensation. (See Proposed United States Trustee Findings of Fact and Conclusions of Law Supporting: (A) Denial of Confirmation on the Grounds that the Debtor's Fourth Amended and Restated Reorganization Plan Does Not Meet the Requirements of 11 U.S.C. § 1129(a)(3) and (11); and (B) Denial of the Debtor's Motion Dated May 7, 2007 to Approve the Supplement to the Paul A. Street Employment Agreement Under 11 U.S.C. § 363(b) , dated Jan. 27, 2010 ("UST Brief").) The United States Trustee still maintains that the Street Employment Motion did not satisfy the "business judgment" test, but her principal concern focuses on the effectiveness of Street's performance during the period covered by the 2007 Supplement, implying that he did not earn his pay. Thus, while the United States Trustee states that Quigley "offered no evidence of industry standards, and whether, for example, executives at other claims-handling units are able to work part-time," (UST Brief ¶ 124), she maintains that "Street had no clear idea of the terms of Pfizer's offer following the Tabulation Ruling," but if he did, "it is patently clear that the terms agreed to by the Debtor were grossly inadequate." (Id. ¶ 125.) Finally, she also states that Quigley never sought an "adjournment of confirmation or otherwise" after Street resigned for the reason that it had lost "Street's `unique familiarity' with Quigley's business or the `issues facing Quigley in its efforts to reorganize.'" (Id. ¶ 126.)
The AHC's post-trial submissions do not address the Street Employment Motion, and I deem its objection abandoned.
The "Tabulation Ruling" refers to the Court's decision reducing the effect of the vote of the Settling Claimants by virtue of the 90% Subordination.
b. The "Business Judgment" Rule
The United States Trustee and Quigley agree that the issues relating to Street's employment are governed, in the first instance, by the "business judgment" rule. "The business judgment rule `is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company.'" Integrated Resources, 147 B.R. 650, 656 (S.D.N.Y. 1992) (citing Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985));accord In re Global Crossing Ltd., 295 B.R. 726, 743 (S.D.N.Y. 2003). This presumption "shields corporate decision-makers and their decisions from judicial second-guessing when the following elements are present: `(1) a business decision, (2) disinterestedness, (3) due care, (4) good faith, and (5) according to some courts and commentators, no abuse of discretion or waste of corporate assets.'" Integrated Resources, 147 B.R. at 656 (quoting DENNIS J. BLOCK, NANCY E. BARTON STEPHEN A. RADIN, THE BUSINESS JUDGMENT RULE 12 (3d ed. 1991)); accord Global Crossing, 295 B.R. at 743. "Courts are loath to interfere with corporate decisions absent a showing of bad faith, self-interest, or gross negligence." Integrated Resources, 147 B.R. at 656 (citing Van Gorkom, 488 A.2d at 872-73); accord In re Metaldyne Corp., 409 B.R. 661, 667-68 (Bankr. S.D.N.Y. 2009) ("In [determining whether the requirements under Code § 363(b) are met] the Court is guided by decisions in this jurisdiction emphasizing that the Court should not substitute its business judgment for that of the Debtors'.") (citations omitted), aff'd 421 B.R. 620 (S.D.N.Y. 2009). "Parties opposing the proposed exercise of a debtor's business judgment have the burden of rebutting the presumption of validity."Integrated Resources, 147 B.R. at 656.
c. Mootness
Although the parties agree on the legal standard, it is not clear how it should be applied. The Street Employment Motion, as such, is moot. Quigley moved to dismiss the motion, and the United States Trustee eventually withdrew her objection. As noted, she did not object to Street's continued service as Quigley's president and chairman provided that he would be subject to disgorgement. As a result, Street continued to serve as Quigley's president and chairman for ten additional months pursuant to a contract under which Quigley agreed to pay him $450,000 on an annual basis. Under the circumstances, the United States Trustee cannot challenge Quigley's decision to extend Street's employment.
Furthermore, the United States Trustee does not argue that Street should be denied all compensation in the absence of an order approving his extended employment. Hence, the denial of the Street Employment Motion at this point does not resolve the fundamental question of whether Street was overpaid. On the other hand, the denial of the Street Employment Motion may raise a host of issues regarding Street's authority during the period covered by the 2007 Supplement when he unquestionably served as Quigley's principal officer and chairman.
I do not mean to suggest that an order was necessary. The Street Employment Motion sought Court authorization to continue to employ Street at half of his salary for another year. His employment had been extended for one year on the same terms in 2005 and 2006. His continued employment under the same terms for less money for another year was an ordinary course transaction and did not require a motion under § 363. E.g., In re Crystal Apparel, Inc., 220 B.R. 816, 834 (Bankr. S.D.N.Y. 1998) ("[T]he one year contract term [extending the executive's employment] was in the ordinary course of business in light of the size and complexity of the Debtors' businesses and the expected length of time the Chapter 11 cases would take until confirmation."); In re All Seasons Indus., Inc., 121 B.R. 822, (Bankr. N.D. Ind. 1990) ("The continued employment of existing management of a debtor-in-possession constitutes part of the operation of debtor's business and is within the ordinary course of business authorized by the Bankruptcy Code. Where post-petition operations are concerned, as long as it confines itself to operating within the ordinary course of business, a debtor-in-possession's actions are cloaked with an aura of propriety and, thus, the debtor is entitled to a presumption concerning the reasonableness of its decisions.")
d. Standing
More importantly, while the order granting Quigley's dismissal motion reserved everyone's rights, it does not follow that the United States Trustee has any rights to assert. If the decision to continue Street's employment at an annual salary of $450,000 (as opposed to firing him or paying him less) was an inappropriate exercise of business judgment, it might give rise to a breach of fiduciary duty claim against Quigley's directors. Alternatively, if the decision to extend Street's employment at $450,000 was an appropriate exercise of business judgment, but Street failed to perform adequately, it might give rise to breach of contract or excessive compensation claims that would subject Street to damages or disgorgement. In either case, the claims belong to Quigley although shareholders and creditors may have standing to assert them derivatively. While section 307 of the Bankruptcy Code grants the United States Trustee the right to appear and be heard on any issue (other than filing a plan under § 1121(c), it does not authorize the United States Trustee to assert control over causes of action belonging to the Quigley estate. Cf. In re Smart World Techs., LLC, 423 F.3d 166, 182-83 (2d Cir. 2005) (Bankruptcy Code § 1109(b) allows a party in interest to intervene in a pending proceeding but does not allow it to take control of the estate's legal causes of action).
e. The Merits
Assuming that the Street Employment Motion is still ripe and the United States Trustee has standing to seek disgorgement on some theory, she has failed to sustain her burden of proof.
i. The Decision to Extend Street's Employment
The decision to extend Street's employment at half his current salary is entitled to the presumption that it was an appropriate exercise of business judgment. The decision served a legitimate business purpose; Quigley needed a president and chairman. The directors that approved the continuation of his employment were disinterested, and there was no evidence of their bad faith, self-interest, or gross negligence.
Moreover, the record amply supports Quigley's decision to continue Street's employment for another year. Street had already served as Quigley's president and chairman for the preceding four years. The proposed extension, like the prior ones, was limited to one year, and paid Street 50% of his salary he received during the preceding four years. Hence, the 2007 Supplement did not commit Quigley to a long-term, expensive obligation, and actually represented a savings over past years. The directors had fully vetted the agreement at their July 2004 meeting, had received the advice of counsel, and were satisfied that Street's continued pursuit of unrelated Impala business would not interfere with the performance of his duties with Quigley.
Street had shepherded Quigley through nearly three years under chapter 11. The Court had denied confirmation, and the Tabulation Ruling forced Quigley to develop a new plan. The record reflects that Quigley generated new versions of the disclosure statement on May 18, 2007 (J23), June 7, 2007 (J25), November 5, 2007 (J38), and Street signed each new draft. The case was obviously at an active and critical stage, there was no evidence of dissatisfaction with Street's services, and there was no reason to change horses mid-stream.
The United States Trustee contends that Quigley nevertheless failed to sustain its burden of proof because Quigley did not offer any evidence of industry standards or whether executives at other claims-handling units are able to work part-time. This argument is based on the decision in In re Dana Corp., 358 B.R. 567 (Bankr. S.D.N.Y. 2006). There, the Court addressed a motion to assume complex pre-petition employment agreements between the debtor on the one hand and its chief executive officer and senior executives. In addition to base salary, the employment agreements included incentive compensation, pension benefits and severance.
The issue was whether the proposed obligations were permissible under 11 U.S.C. § 503(c)(3) which precludes, inter alia, a debtor from paying money or incurring administrative obligations to insiders outside of the ordinary course of business that are "not justified by the facts or circumstances of the case." The Court stated that in determining whether a proposed incentive plan is supported by "sound business judgment," it must consider the structure of the proposal and the process through which it was developed. Id. at 576. The relevant factors, repeated by the United States Trustee in her post-trial brief, (see UST Brief ¶ 122), include whether the plan bears a reasonable relationship to the results to be obtained, whether the cost of the plan is reasonable in light of the debtor's assets, liabilities and earning potential, whether the plan applies to all employees, or alternatively, discriminates unfairly, whether the plan is consistent with industry standards, and whether the corporation exercised due diligence in determining the need for the plan, analyzing which key employees should be incentivized, what is available and what is generally applicable in the particular industry, and finally, whether the debtor received advice from independent counsel in performing due diligence and in creating and authorizing the incentive compensation. Dana, 358 B.R. at 576-77. Dana is distinguishable, and does not govern the Street Employment Motion. The Dana court was interpreting a provision — § 503(c)(3) — enacted in 2005. Quigley's case was filed prior to the enactment of BAPCPA, and § 503(c)(3) does not apply. Even if it did, the factors listed by the Dana court do not. The 2007 Supplement was not an incentive plan. It applied to one person; it ran for one year; it was limited to base salary. Dana does not require a corporation to proffer evidence of "industry standards, and whether, for example, executives at other claims-handling units are able to work part time" before extending the employment of the corporation's current president for one year at 50% of his salary. Finally, Street had been providing his services "part time" without complaint, so there was no need to canvass the industry to determine if comparable officers of comparable companies could or could not do their jobs on a part-time basis.
The argument implies that Quigley was simply a claims handling unit. It ignores the fact that it was also a chapter 11 debtor that had to deal with a variety of constituencies while attempting to confirm a plan over the increasing opposition of the United States Trustee, the AHC and the insurers.
ii. Street's Compensation During the Extended Period
As noted, the United States Trustee's principal contention is that Street failed to perform competently after his contract was extended, and his compensation should be denied or limited. Following the Tabulation Ruling, Pfizer waived the 90% Subordination. The effect of the waiver was to dilute the recovery to the asbestos claimants and the Futures. The question was how much more Pfizer would have to contribute to maintain the 7.5% distribution contemplated prior to the waiver.
Quigley initially agreed with Pfizer that Pfizer should contribute $18 million in cash on the effective date. Street's deposition testimony and trial testimony showed that he did not participate in the determination that $18 million was sufficient and did not make any inquiry before signing a draft disclosure statement that said it was. (Tr. 1001:16-20; 1002:4-15.) As a result of subsequent negotiations spearheaded by the FCR, Pfizer eventually agreed to increase its contribution by an additional $95 million. (Tr. 2164:13-2169:8 (Togut).)
Accepting the United States Trustee's contention that Street failed to familiarize himself with the negotiations with Pfizer and agreed to a grossly inadequate contribution, she has not explained how this should affect Street's compensation. Except for the Pfizer negotiations, the United States Trustee does not contend that Street failed to comply with the terms of his agreement. More importantly, the United States Trustee does not contend and has certainly not proved that Street's actions or inactions injured Quigley or any other party in the case. Finally, the United States Trustee failed to supply any evidence of compensation paid to similarly-situated executives to support her excessive compensation claim.
The United States Trustee's last point — that Quigley never sought an adjournment of the confirmation hearing after Street departed and Quigley lost his experience — is frivolous. Kim Jenkins succeeded Street. She had run the CHU for years, and participated extensively in the bankruptcy. In fact, she signed the Fourth Plan and Disclosure Statement, both dated March 28, 2008, in her capacity of Senior Vice President. (See J42 at 120; J43 at 61.) Quigley obviously planned for Street's succession, and that hardly provides a reason to conclude that he did not earn his pay, or that the decision to hire him in the first place was wrong.
Street's resignation became effective two days later.
Accordingly, the Court overrules the United States Trustee's objections to the Street Employment Motion.
CONCLUSION To recapitulate, Quigley's motion to confirm the Fourth Plan is denied, Quigley's motion to strike portions of Shaked's testimony, related exhibits and report is granted in part and denied in part, the Sealing Motion is denied and the United States Trustee's objection to the Street Employment Motion is overruled. The foregoing constitutes the Court's findings of fact and conclusions of law. Counsel are directed to schedule a conference to address the dismissal or other disposition of this case. Settle order on notice.