In Re: 60 91st Street Corp.

Background

60 91st Street Corp. filed a voluntary Chapter 11 bankruptcy petition. The corporation owns an apartment building at 60 West 91st Street in Manhattan. Kim Mortimer, the corporation’s sole shareholder and principal, was acting on behalf of the debtor-in-possession, meaning the debtor remained in control of its business and property during the bankruptcy. Mortimer represented herself in this appeal.

At a creditors’ meeting, counsel for Mortimer represented that cash collateral—cash or other receipts generated in the business—would not be spent without a budget agreement with the corporation’s pre-petition lender, 2386 Hempstead, Inc. At a later hearing, Mortimer admitted that she had used cash collateral for business operations and personal purposes without court permission, despite being told that doing so was unlawful. The Bankruptcy Court also discussed her failure to produce other information relevant to the possibility of successfully restructuring the corporation.

After another hearing, the Bankruptcy Court found cause to appoint a Chapter 11 trustee. It relied on Mortimer’s continued use of cash collateral, reflected in a monthly operating report, and her inability to cure earlier deficiencies. The Bankruptcy Court later approved Heidi J. Sorvino as trustee. Mortimer appealed the order directing the trustee’s appointment.

Issues on Appeal

Construing Mortimer’s filings liberally, the District Court addressed three arguments: that the evidence did not support a finding of cause; that the Bankruptcy Court lacked statutory authority to appoint a trustee on its own initiative; and that the appointment violated procedural and substantive due process.

Legal Standard

The District Court reviewed the Bankruptcy Court’s legal conclusions without deference, its factual findings for clear error, and discretionary decisions for abuse of discretion. Appointment of a Chapter 11 trustee is reviewed for abuse of discretion. A court abuses its discretion if it relies on an incorrect legal rule, clearly erroneous facts, or a clear error of judgment.

Analysis

The District Court held that the Bankruptcy Court did not clearly err in finding cause for appointment. Section 1104 of the Bankruptcy Code allows appointment for cause, including fraud, dishonesty, incompetence, gross mismanagement, or similar cause. The District Court explained that the listed examples are not exclusive and that misuse of assets, inadequate record-keeping or reporting, and conduct showing dishonesty or lack of creditor confidence may also constitute cause.

The record supported the Bankruptcy Court’s findings that Mortimer misused funds by making an unauthorized payment to herself, misrepresented when the misuse would stop, failed to correct an asset deficiency, and continued making unauthorized transfers for personal use despite repeated warnings. The District Court concluded that this conduct amounted to similar cause under Section 1104 and supported appointment of a trustee.

The District Court also held that the Bankruptcy Court had statutory authority to appoint a Chapter 11 trustee on its own initiative. It relied on Section 105(a), which permits a bankruptcy court to take action necessary or appropriate to enforce orders or rules or prevent abuse of the bankruptcy process, and on the conclusion that sufficient grounds for appointment existed under Section 1104.

On due process, the District Court explained that the Bankruptcy Code requires notice and an opportunity for a hearing appropriate to the circumstances. It rejected Mortimer’s argument that she needed advance, specific notice that the Bankruptcy Court would appoint a trustee on its own initiative. The court emphasized that Mortimer had been told she could not use cash collateral unlawfully, had been warned about the consequences of her misconduct, and had an opportunity through counsel to respond to the appointment issue at the relevant hearing. She was also allowed to be heard after the ruling and did not then object that notice or the opportunity to respond had been inadequate.

The District Court separately rejected Mortimer’s substantive due process argument, finding that the appointment was not shown to be so arbitrary, oppressive, or shocking as to violate substantive due process.

Disposition

The court dismissed Mortimer’s appeal and affirmed the Bankruptcy Court’s order directing appointment of a Chapter 11 trustee. It denied as moot Mortimer’s renewed request to stay actions concerning the sale, marketing, auctioning, or advertising of the debtor’s assets.