John T. Gregg, United States Bankruptcy Judge.
This matter comes before the court in connection with a motion to intervene [Adv. Dkt. No. 30] (the "Motion to Intervene") filed by the Official Committee of Unsecured Creditors (the "Committee") in the above-captioned adversary proceeding. The Committee seeks to intervene as a defendant to determine, among other things, whether certain goods with a value of approximately $20 million constitute property of the estate, or whether such goods remain property of certain vendors (collectively, the "Plaintiffs"), all of whom allegedly sold goods to the Debtors (as defined below) on consignment. For the following reasons, the court shall deny the Motion to Intervene.
The court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b) and 157(b). This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), (K) and (O).
Headquartered in Grand Rapids, Michigan, Family Christian, LLC (the "Operating Debtor") and its debtor-affiliates, Family Christian Holding, LLC and FCS Giftco, LLC (together with the Operating Debtor, the "Debtors"),
The Debtors' beginnings can be traced to Zondervan Stores, which was established sometime in the 1930s. In the 1990s, Zondervan Stores changed its name to Family Christian Stores. Family Christian Stores was acquired by the Debtors' current ownership in 2012. The Debtors operate as non-profit organizations whose collective mission is to donate their profits to the Non-Debtor Parent for charitable purposes such as disseminating bibles, supporting orphans and others in need, funding mission trips, and orchestrating relief efforts. However, due to their financial difficulties, since 2012 the Debtors have remitted only approximately $300,000 to the Non-Debtor Parent for charitable purposes.
According to the Debtors, their financial problems relate to various factors, including changing market conditions and the debt load placed upon the Debtors as a result of the 2012 sale transaction. In 2012, the Debtors obtained a revolving line of credit from JPMorgan Chase. In return, the Operating Debtor granted to JPMorgan Chase an alleged first priority security interest in certain of its assets, and a subordinated security interest on the remainder of its assets. The sale transaction in 2012 was also financed by a term loan from certain third party lenders (the "Term Lenders") for which Credit Suisse AG, Cayman Islands Branch ("Credit Suisse") acts as agent. As security for repayment of the term loan, the Debtors granted the Term Lenders an alleged first
In 2014 the Debtors apparently began to suffer liquidity problems and were unable to satisfy certain obligations to JPMorgan Chase.
On February 11, 2015, the Debtors each filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. The United States Trustee (the "UST") appointed the Committee on February 23, 2015 [Dkt. No. 158]. The Committee is comprised of various unsecured creditors, four of whom are now Plaintiffs in this adversary proceeding.
One day after filing their petitions, the Debtors filed a motion seeking to sell substantially all of their assets [Dkt. No. 30] to a proposed stalking horse bidder, FCS Acquisition, LLC, which is not only affiliated with the Non-Debtor Parent, but is also controlled by Richard Jackson. The initial sale motion proposed to sell all of the Debtors' inventory, including inventory allegedly subject to consignment arrangements with the Plaintiffs and other vendors. As of the petition date, the consignment inventory was alleged to be worth approximately $20 million. After numerous creditors and other parties in interest objected to the proposed sale due to, among other things, its insider nature, the Debtors withdrew their sale motion.
Seemingly as a countermeasure to the initial sale motion, the Plaintiffs commenced this adversary proceeding. The complaint, which, to date, has been amended several times, seeks (i) a declaration that the inventory was sold by the Plaintiffs to the Debtors pursuant to consignment agreements and is not property of the Debtors' estates, (ii) an injunction prohibiting the Debtors from selling the alleged consigned goods, and (iii) turnover of the alleged consigned goods to the Plaintiffs,
Several weeks after the initial sale motion was withdrawn, the Debtors filed a second motion seeking to sell substantially all of their assets [Dkt. No. 487]. The second sale motion does not propose to sell the assets to a stalking horse bidder; rather, the Debtors proposed to expeditiously and aggressively market their assets through an investment banker in order to identify potential bidders. Although this second sale motion drew numerous objections, the bidding procedures component was, in large part, supported by the Committee, the Lenders and other parties, including the Plaintiffs, after certain revisions were made. The court approved these bidding procedures on April 16, 2015 [Dkt. No. 597]. Notwithstanding the consensual nature of the bidding procedures, the parties, to date, have been unable to resolve the primary issue in this adversary proceeding — whether the goods sold by the Plaintiffs to the Debtors constitute property of the estate subject to sale by the Debtors.
The court held a status conference on April 14, 2015, to discuss intervention by third parties, among other things. That same day, the court entered a Scheduling Order in both the adversary proceeding [Adv. Dkt. No. 21] and the Debtors' underlying bankruptcy cases [Dkt. No. 591]. The Scheduling Order, which was served on the matrix, established a deadline by which any proposed intervenor must file a motion to intervene.
On or before the deadline, numerous consignment vendors, as well as the Lenders and the Committee, filed motions to intervene [Adv. Dkt. Nos. 12, 25, 29, 30, 34] pursuant to Fed. R. Bankr. P. 7024 (incorporating Fed. R. Civ. P. 24). None of the motions, other than the Motion to Intervene filed by the Committee, drew an objection.
In its Motion to Intervene, the Committee seeks to intervene both as a matter of right and permissively. The Committee's request is understandable, particularly in light of the value of the consignment inventory, as well as the requests to intervene filed by all other major parties in the Debtors' bankruptcy cases. According to the Committee, it is entitled to intervene as a matter of right because, among other things, (i) it has a substantial legal interest in the adversary proceeding that will be impaired absent intervention, and (ii) the defendants in the adversary proceeding (i.e., the Debtors and potentially the Lenders) do not adequately represent the interests of unsecured creditors.
Alternatively, the Committee requests the court exercise its discretion and permit the Committee to intervene because the Committee's involvement would not alter any claims or defenses asserted by the Plaintiffs or the Debtors, respectively. Moreover, the Committee submits that no prejudice or undue delay to the existing parties would occur by permitting it to intervene.
The Plaintiffs filed a lengthy objection [Adv. Dkt. No. 43] (the "Objection") to the Motion to Intervene. The Plaintiffs contend that the Committee cannot intervene as a matter of right because (i) the Committee has no direct or substantial interest that would be impaired, and (ii) even if the Committee and its constituency have interests
The court conducted a hearing regarding the Motion to Intervene on April 29, 2015, after which the court decided to take the matter under advisement. None of the Plaintiffs or the Committee sought to admit any documents into evidence or to elicit any testimony in support of their respective positions. After careful consideration of the Motion to Intervene, the Objection, and the arguments made at the hearing, the court concludes that the Committee has neither established a right to intervene nor demonstrated that permissive intervention is warranted.
The Committee first requests intervention as a matter of right under Fed. R. Civ. P. 21. Rule 24 provides that upon a timely motion, the court must permit intervention by a party who:
Fed. R. Civ.P. 24(a) (emphasis added).
The Sixth Circuit Court of Appeals has identified the following four elements, each of which must be satisfied before a party will be permitted to intervene as a matter of right: (i) timeliness of the motion to intervene, (ii) the movant's substantial legal interest, (iii) the impairment of the movant's ability to protect that interest in the absence of intervention, and (iv) inadequate representation of that interest by the existing parties. Harker v. Troutman (In re Troutman Enterprises, Inc.), 286 F.3d 359, 363 (6th Cir.2002); Stupak-Thrall v. Glickman, 226 F.3d 467, 471 (6th Cir.2000) (citations omitted). The party seeking to intervene has the burden of demonstrating each element by a preponderance of the evidence. Id. (citing Grubbs v. Norris, 870 F.2d 343, 345 (6th Cir.1989)).
At the hearing, the Plaintiffs acknowledged that the Motion to Intervene was filed in accordance with the Scheduling Order and was therefore timely. As such,
The court next considers whether the Committee has a substantial legal interest in the adversary proceeding. The Committee must only demonstrate that it has a "significantly protectable interest," meaning one that is "direct and substantial." Meyer Goldberg, Inc. of Lorain v. Goldberg, 717 F.2d 290, 292 (6th Cir.1983) (quoting Donaldson v. United States, 400 U.S. 517, 532, 91 S.Ct. 534, 27 L.Ed.2d 580 (1971); Brewer v. Republic Steel Corp., 513 F.2d 1222, 1223 (6th Cir.1975)). Although Fed.R.Civ.P. 24(a) should be broadly construed in favor of the proposed intervenor, the intervenor must nevertheless demonstrate a significantly protectable interest, or at least the potential for one under the circumstances in any given case. The bar is not high, however. See Grutter v. Bollinger, 188 F.3d 394, 399 (6th Cir.1999).
In its Objection and at the hearing, the Plaintiffs devoted limited argument to this element, contending somewhat generically that the Committee has no interest in property, especially because the Committee seeks to protect contingent claims of unsecured creditors. As support the Plaintiffs cite to a recent decision from the Sixth Circuit Court of Appeals where the court discussed the distinction between a legally protectable interest and a contingent interest. See Reliastar Life Ins. Co. v. MKP Investments, 565 Fed.Appx. 369, 373 (6th Cir.2014); but see also Triax Co. v. TRW, Inc., 724 F.2d 1224, 1227 (6th Cir.1984) (affirming trial court's holding that contingent interest satisfied requisite element for intervention as of right). In Reliastar the Sixth Circuit ultimately stated that it was unnecessary to decide whether a legally protectable interest existed because the proposed intervenor's interests were adequately represented by an existing party. Id. While the discussion of this element in Reliastar is helpful, it is not determinative.
Moreover, even if Reliastar does to some extent discount contingent interests, the Sixth Circuit in Reliastar did not consider intervention by a committee in the context of a bankruptcy adversary proceeding. In an earlier decision that remains good law, the Sixth Circuit held that a creditor seeking to intervene in a private antitrust action prosecuted by a bankruptcy trustee did possess a direct substantial interest so as to give rise to intervention as a right. Meyer Goldberg., 717 F.2d at 293. This court finds the Committee's interest in this adversary proceeding on behalf of unsecured creditors to be analogous to that of the creditor in Meyer Goldberg, which this court views as highly persuasive, if not controlling, authority.
Finally, the Sixth Circuit has instructed courts to employ an "expansive notion of the interest sufficient to invoke intervention of right." Mich. State AFL-CIO v. Miller, 103 F.3d 1240, 1245 (6th Cir.1997) (collecting cases). The Committee, while itself not typically a claimholder, is indisputably a representative for an entire constituency of claimholders that could receive a direct benefit in the event that the consignment inventory is deemed to be property of the estate. As such, the Committee, on behalf of its constituents, holds a pecuniary interest in the adversary proceeding. See Munford, Inc. v. TOC Retail, Inc. (In re Munford, Inc.), 115 B.R. 388, 389 (Bankr.N.D.Ga.1990) (finding committee had actual and direct interest because unsecured creditors held $43 million in claims). To hold otherwise would frustrate one of the fundamental purposes of the Committee, protector of, and advocate for, unsecured creditors. See, e.g., In re Residential Capital, LLC, 480 B.R. 550,
The court next considers whether the Committee has the ability to protect its interest from impairment absent intervention in this adversary proceeding. In its Motion to Intervene, the Committee states that a proposed intervenor need only demonstrate that impairment is possible. However, as emphasized by the Plaintiffs at the hearing, the analysis requires more than possible impairment; it also expressly contemplates that there be insufficient means by which to protect against such impairment.
In this adversary proceeding, the Committee clearly has an adequate opportunity to protect its interests without intervention. First, on a most basic level, the Committee always has the ability to monitor this adversary proceeding (as well as any others) to ensure that its rights are not being compromised in any way. See also In re 8309 Talbot Place Corp., 27 F.Supp. 40, 41 (E.D.N.Y.1939) (denying committee's motion to intervene but ordering notice be given to committee in case under Bankruptcy Act). At the hearing, the Committee acknowledged that it has a rather " transparent relationship with the Debtors, who have apparently been forthcoming with documents and other information requested by the Committee. The court was also left with the impression that the Debtors and the Committee communicate on a fairly routine basis regarding various issues, including, presumably, the alleged rights of the consignment vendors and the impact thereof on the sale process and the Debtors' estates in general. There is no reason to believe that the Committee will not have the same opportunities with respect to this adversary proceeding, and the Committee has not argued otherwise.
Second, in the event that the Debtors seek to resolve the adversary proceeding, any compromise would need to be subject to the notice and hearing requirement of Fed. R. Bankr. P. 9019. At that point in time, the Committee would have an opportunity to object to any proposed compromise, engage in discovery, and directly participate in an evidentiary hearing to determine if the settlement is fair and equitable. See Meyer Goldberg, 717 F.2d at 294 (affirming lower court's denial of permissive intervention because proposed intervenor could object to any compromise in underlying bankruptcy case).
Third, as recognized by other courts, nothing precludes a party from seeking leave to file an amicus brief. See, e.g., Bradley v. Milliken, 828 F.2d 1186, 1194 (6th Cir.1987) (affirming denial of intervention because, in part, intervenors' interests protected through amicus opportunity); Simetco, Inc. v. Amsouth Bank, N.A. (In
Fourth, in the event that the Committee uncovers evidence that defenses are somehow being impaired or claims of the estate not being pursued, the Committee may always seek derivative standing or even the drastic measure of requesting the appointment of a trustee. See Canadian Pacific Forest Products Ltd. v. J.D. Irving, Ltd. (In re The Gibson Group, Inc.), 66 F.3d 1436, 1446 (6th Cir.1995) (citing In re Automated Business Systems, Inc., 642 F.2d 200 (6th Cir.1981); Matter of Xonics Photochemical, Inc., 841 F.2d 198 (7th Cir. 1988)).
Fifth, as part of its Scheduling Order, the court required existing parties to the adversary proceeding, as well those seeking to intervene, to file a statement indicating whether they would voluntarily participate in facilitative mediation.
In sum, the court concludes that the Committee has an ability to protect its interests outside of this adversary proceeding and, therefore, intervention is not warranted.
The court last considers whether existing parties, and the Debtors in particular, are adequately representing the interests of the Committee and unsecured creditors.
The Committee next argues that the Debtors and the Committee are not necessarily aligned with respect to the interests of FC Special Funding, which filed its own motion to intervene. This argument has more traction, especially in light of the insider (or at least affiliated) nature of the relationship between the Debtors and FC Special Funding. In its motion, FC Special Funding sought to intervene not only to assert that the consignment inventory is property of the estate, but also to obtain a declaration that FC Special Funding has a valid, first priority security interest in the consignment inventory.
Based on the record before the court, the Committee has not rebutted the presumption that the Debtors, who seek to maximize the return for their estates' stakeholders, will not sufficiently represent the interests of the Committee and the unsecured creditors. The court therefore finds that the Committee is not entitled to intervene as of right.
As an alternative basis for intervention, the Committee relies on Fed. R. Civ. P. 24(b), which provides that on a timely motion, the court may permit anyone to intervene who:
Fed. R. Civ.P. 24(b)(1).
According to the Sixth Circuit, a party seeking permissive intervention must first establish that its motion is timely and asserts at least one common question of fact or law. United States v. Mich., 424 F.3d at 445 (citation omitted). Upon such a showing, the court is required to consider undue delay and prejudice to the existing parties, as well as any other relevant factors. Id.
This court is persuaded by the rationale of other courts in the Sixth Circuit that have denied requests by committees seeking to permissively intervene in adversary proceedings. CVC, Inc. v. Conway, Patton & Bouhall (In re CVC, Inc.), 106 B.R. 478, 480 (Bankr.N.D.Ohio 1989) (denying permissive intervention due to, among other things, increased costs and ability to monitor); Pioneer Investment Services Co. v. Valley Fidelity Bank & Trust Co. (In re Pioneer Investment Services Co.), 106 B.R. 507, 510 n. 5 (Bankr.E.D.Tenn.1989) (denying permissive intervention due to duplication of effort, costs and delays); Simetco, Inc. v. Amsouth, Bank, N.A. (In re Simetco, Inc.), 1994 WL 470490 (Bankr. N.D.Ohio Aug. 15, 1994) (noting caution must be exercised to avoid inefficiencies and duplication, particularly where intervenor asserts identical position); see Meyer Goldberg, 717 F.2d at 294 (affirming lower court's denial of permissive intervention because proposed intervenor had ability to object to any compromise in underlying bankruptcy case).
In the instant adversary proceeding, the court finds the Motion to Intervene is unquestionably timely and asserts at least one common question of fact or
Second, it is possible that the Committee's direct participation in this adversary proceeding would prejudice the existing parties, and the Plaintiffs in particular. As the Plaintiffs suggest in their Objection, they would likely be forced to incur additional costs by having to respond to pleadings and discovery requests from the Debtors and the Committee, all of whom share the same defenses (and potentially, causes of action) on behalf of the Debtors' estates, as discussed above. In addition, the involvement of the Committee might lead to confusion of the parties, especially in light of the overlapping roles of the Committee and the Debtors.
Finally, although the Committee suggests that it would make every effort to avoid duplication and minimize its role in order to reduce costs, as a party to the adversary proceeding, the Committee would be charged with direct participation. A party to litigation cannot simply proclaim dormancy or a reduced role. The court therefore declines to exercise its discretion to permit the Committee to intervene in this adversary proceeding.
For the foregoing reasons, the court denies the Motion to Intervene. The court shall enter a separate order consistent with this Memorandum Decision.