Free Memorandum Opinion - District Court of Delaware - Delaware

Case 1:07-cv-00487-JJF

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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
IN RE: THE FINOVA GROUP, INC., and a Delaware corporation, et al., Debtors. Chapter 11 Case No. 01-0698-PJW Jointly Administered Adv. Pro. No. 07-50004-CSS

THE OFFICIAL COMMITTEE OF EQUITY SECURITY HOLDERS of FINOVA GROUP, INC., Appellant,
v.

Civil No. 07-480-JJF and Civil No. 07 487-JJF Bankruptcy Case No. 01-698 AP 07-70

THE FINOVA GROUP, INC., and FINOVA CAPITAL CORPORATION, Appellants.

Mark D. Silverschotz, Esquire; James Andriola, Esquire and Han J.
Ahn, Esquire of ANDERSON KILL & OLICK, P.C., New York, New York.
William D. Sullivan, Esquire of WILLIAM D. SULLIVAN, LLC,
Wilmington, Delaware.
Attorneys for Appellant.
Jonathan M. Landers, Esquire and Robert K. Dakis, Esquire of
GIBSON, DUNN & CRUTCHER LLP, New York, New York.
Mark D. Collins, Esquire and Jason M. Madron, Esquire of
RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware.
Attorneys for Appellees.


MEMORANDUM OPINION

August 26, 2008 Wilmington, Delaware

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Pending before the Court in these actions are two appeals involving six orders entered by the United States Bankruptcy Court for the Dist Offici ct of Delaware ("Bankruptcy Court"). The

Committee of Equity Security Holders (the "Equity

Committee") on behalf of the shareholders (the "Equity Holders") of Finova Group, Inc., the corporate parent of Finova Capital Corporation (collectively, the "Debtors"), appeals from two orders of the Bankruptcy Court: (i) the Order Granting Debtors'

Motion Requesting Clarification of Confirmed Chapter 11 Plan, entered on June 26, 2007 ("the Final Clarification Order"), and (ii) the Order Regarding Debtors' Motion Requesting Clarification of Confirmed Chapter 11 Plan entered on February 1, 2006 (the "First Clarification Order") (D. I. 1).1 In addition, the Debtors

cross appeal from (i) the Order Directing United States Trustee to Appoint an Official Committee of Equity Security Holders for a Limited Purpose and Granting Related Relief, entered on June 17, 2005 ("the Equity Committee Order") i (ii) the Order Increasing

the Cap Previously Imposed on Fees and Expenses Which Can be Incurred on Behalf of the Equity Committee, entered on January 3, 2006 (the "First Fee Cap Order"); (iii) the Order Regarding

Application for an Order, Pursuant to Section 327(e) of the

1 All Docket Item ("D.I.") numbers are from Civil Action No. 07-480, unless otherwise noted.
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Bankruptcy Code and Fed. R. Bankr. P. 2017, Increasing the Cap on Fees and Expenses Which Can be Incurred on Behalf of the Equity Committee and the Final Order Request, entered on February 6, 2007 (the "Second Fee Cap Order") i and (iv) the Order Increasing the Cap Previously Imposed on Fees and Expenses Which Can be Incurred on Behalf the Equity Committee, entered on July 26,

2007 (the "Third Fee Cap Order", and together with the First Fee Cap Order and the Second Fee Cap Order, the "Fee Cap Orders") (D.I. 23; D.I. 1 in C.A. 07-487). The Equity Committee has also

filed a Motion to Strike those portions of the Debtors' Response to Appellant's Opening Brief and Opening Brief on Cross-Appeal which address the Debtors' Cross-Appeal (D.I. 27). For the

reasons discussed, the Court will (1) deny the Equity Committee's Motion to Strike; (2) affirm the Bankruptcy Court's Final and

rst Clarification Orders; and (3) affirm the Bankruptcy Court's Equity Committee Order and Fee Cap Orders.

I.

The Equity Committee's Motion to Strike
By its Motion, the Equity Committee moves to strike those

portions of Appellee-Debtor's Response to Appellant's Opening Brief and Opening Brief on Cross-Appeal ("Response Brief") 23) which address Debtor's Cross-Appeal. (D.I.

The Equity Committee

contends that the Cross-Appeal should not have been labeled as such, as it is an entirely separate appeal and assigned its own case number in this Court, Civil Action No. 07-487 ("the Cross

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Appeal Docket").

The Equity Committee contends that the 10-day

appeal period with respect to the Equity Committee Order, the December 2005 Fee Cap Order and the February 6, 2007 Fee Cap Order has long since expired, and the Equity Committee filed a motion to dismiss the Debtor's appeal of these orders in the Cross-Appeal Docket. The Equity Committee also contends that

briefing on the Debtors' cross-appeal is premature because the Debtors' cross appeal was never referred to mediation and a separate briefing schedule for the cross appeal was never set on the Cross-Appeal Docket. In response, the Debtors contend that the Equity Committee's Motion to Strike should be denied because the orders involved in the cross-appeal were rendered during the proceedings on the Clarification Motion, and related to the Clarification Motion. The Debtors further argue that the Motion to Strike should be dismissed to the extent it seeks to introduce the Equity Committee's substantive response to the Debtor's cross-appeal, because the Equity Committee failed to brief the cross-appeal issues in its responsive brief and, as a result, exceeded page limitations by filing a separate brief addressing the cross appeal. The Court has previously addressed the timeliness of the Debtors' cross-appeal in the context adjudicating the Equity

Committee's Motion to Dismiss filed in Civil Action No. 07-487.

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In re Finova Group, Inc., 2008).

2008 WL 522965 (D. Del. Feb. 26,

In that decision, the Court concluded that the cross

appeal was not untimely because the Orders being appealed were related to the Debtors' Clarification Motion, and therefore, were timely appealed once the Bankruptcy Court resolved the Debtors' Clarification Motion. In light of this conclusion, the Court

likewise concludes that the Debtors' appeal is properly considered a cross-appeal. Advisory Committee notes. Fed. R. Bankr. P. 8002(a) & related While the Court acknowledges that

briefing in this case did not proceed consistently with the Bankruptcy Rules or the Local Rules, the Court, in its discretion, finds this screpancy to be insufficient to strike The

the Equity Committee's substantive response at this time.

Debtors have filed a Reply (D.I. 29) to the Equity Committee's substantive response to their cross appeal, and the parties have fully briefed all the issues related to both the appeal and cross-appeal. Because the parties have had sufficient

opportunity to present their substantive arguments to the Court, the Court will treat both the appeal and cross appeal as fully and completely briefed, and therefore, the Court will deny the Equity Committee's Motion To Strike and proceed to resolve on the merits the issues presented in both the appeal and cross appeal.

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II. The Equity Committee's Appeal from the Bankruptcy Court's First and Final Clarification Orders

By their Clarification Motion filed April 1, 2005, the Debtors sought an order from the Bankruptcy Court clarifying the Plan with respect to the 5% distribution on account of Equity Holders. According to the Debtors, this distribution could not

be made in light of the provisions in the Plan preventing such distributions to Equity Holders under conditions of financial impairment. At a hearing on November 29, 2005, the Bankruptcy

Court granted the Debtor's Clarification Motion to the extent that the Debtor is presently and will be forever insolvent and concluded that the Plan and Indenture were not ambiguous and that the Equity Committee's arguments were "either irrelevant or offthe-wall." (D.I. 18, Exh. L at 52-57.) On February 1, 2006, the

Bankruptcy Court entered an order memorializing its opinion (the "First Clarification Order,"), which left open questions regarding the Debtor's financial condition. (D.I. 18 at Exh. N.)

On June 26, 2007, the Bankruptcy Court entered the Final Clarification Order, which found that the Debtors "presently are and will be forever insolvent," and that: ... under the Indenture dated as of August 22, 2001 governing the issuance of the 7.5% Senior Secured Notes Maturing 2009 of The FINOVA Group Inc. (the "New Senior Notes"), the payment of any amount to or on account of the Equity Interests of The FINOVA Group Inc. ("FNV Group") would be an Impermissible Restricted Payment and cannot be made pursuant to section 4.06(a) (v), FIFTH, clause (x) of the Indenture, (3) there is no reasonable probability that, under the terms of the
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Indenture, any such payment on account the Equity Interests of FNV will be permitted in the future ... at Exh. 0.) A. Parties' Contentions

The Equity Committee contends that the Bankruptcy Court erred when it determined that the Disclosure Statement, plan and Indenture are not ambiguous. The Equity Committee contends that

the Debtors' filing of a motion to "clarifytt constitutes a tacit admission by the Debtors that the plan and Indenture at issue are ambiguous. The Equity Committee further contends that, "when

read properly,tt the Disclosure Provisions indicate that, under the Plan, even if the Debtors cannot pay the New Senior Notes in full, the Equity Holders will still receive some level of distribution. The Equity Committee contends that the Bankruptcy

Court ignored or misapprehended well-established contract principles, as the Bankruptcy Court: (1) should have construed

all ambiguities in the plan and Indenture against the Debtorsi (2) erred when interpreted the provisions of the Plan and

Indenture to effect the forfeiture of the Equity Holders' right to payment; (3) erred in its interpretation of the controlling

documentsi and (4) erred when it interpreted the plan and Indenture in a way that created a condition precedent to the Equity Holders' right to payment. The Equity Committee contends

that the Bankruptcy Court should have recognized that the Plan constituted a new contract between the Debtors and the Equity
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Holders, and pursuant to this contract, the Debtors were obligated to make payments to the Equity Holders, which payments should be considered "Plan-created debt." (D.I. 17 at 6.)

Finally, the Equity Committee contends that Debtor's argument that payment of funds to the Equity Holders would be an "impermissible restricted payment" is not supported by the applicable law. In response to the Equity Committee's arguments, the Debtors point out that this appeal "concerns the Bankruptcy Court's interpreting the Plan, sclosure Statement and Indenture as

unambiguous and providing that the Debtor could cease setting retaining payments on account of equity and could use funds previously retained for general corporate purposes because the Debtors were 'forever insolvent.'" (D.I. 23 at 2.) Accordingly,

the Debtors contend, that the Third Circuit's recent holding in In re Shenango Group Inc., 501 F.3d 338, 346 (3d Cir. 2007), applies, under which a bankruptcy court's interpretation of its own order is subject to review for an abuse discretion. The

Debtors contend that, under Shenango, the Court should defer to the Bankruptcy Court's interpretation unless it is unreasonable under the circumstances, a standard which the Debtors contend, the Equity Committee has not come close to meeting. The Debtors

further contend that the Equity Committee's appeal is a reiteration of those arguments that were already rejected

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their entirety by the Bankruptcy Court. B. Standard of Review

The Court has jurisdiction to hear an appeal from the Bankruptcy Court pursuant to 28 U.S.C. a review
§

158(a).

In undertaking

the issues on appeal, the Court applies a clearly

erroneous standard to the Bankruptcy Court's findings of fact and a plenary standard to its legal conclusions. See Am. Flint Glass

Workers Union v. Anchor Resolution Corp., 197 F.3d 76, 80 (3d Cir. 1999). wi mixed questions of law and fact, the Court must

accept the Bankruptcy Court's finding of "historical or narrative facts unless clearly erroneous, but exercise[sJ of the trial court's choice and interpretation and its application 'plenary review legal precepts

those precepts to the historical facts.'N

Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635, 642 (3d Cir. 1991) (citations omitted). The appellate

responsibilities of

Court are further understood by the Third Circuit, which focuses and novo basis in the Cir.

jurisdiction exercised by

reviews the Bankruptcy Court decision on a rst instance. 2002) .

In re Telegroup, 281 F.3d 133, 136 (

c.

Discussion

Both parties cite to the Third Circuit's decision in shenango, 501 F.3d at 338 (3d Cir. 2007) in support of their contentions. The Court's reading of Shenango supports the

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Debtors' arguments.

In Shenango, the Third Circuit held that a

Bankruptcy Court's interpretation of its own order is subject to review for an abuse of discretion, unless the issue being reviewed presents only a question of law, in which case it is subject to de novo review. at 346. The Third rcuit then

concluded that the determination of whether relevant documents are ambiguous in the first instance is subject to de novo review. The Third Circuit went on to state that if "the Plan is ambiguous, we will defer to the Bankruptcy Court's interpretation unless it is unreasonable under the circumstances.
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Reviewing the decision of the Bankruptcy Court in light of the applicable standard of review and governing legal principles, Court concludes that the Bankruptcy Court correctly determined that the provisions of the Plan and Indenture are unambiguous, and that together, they provide that Equity Holders may receive a distribution if the distribution is permissible under applicable law, the Debtors would not be insolvent as a result of the distribution, and the distribution would not be a fraudulent conveyance. In reaching this conclusion, the Court

agrees with and adopts the Bankruptcy Court's analysis and interpretation of the plan and Indenture. 2 {D.I. 18, Exh. L at

While the Court agrees with the Bankruptcy Court that the documents at issue are unambiguous, the Court reaches the same result even if it concludes that the documents present an ambiguity, because the Court cannot conclude that the Bankruptcy Court's interpretation of the documents was unreasonable.
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52-57.)

The Court further finds that the Bankruptcy Court

properly determined whether the relevant documents were ambiguous by hearing the proffer the Equity Committee first (D.I. 18 at

26-27, 38, 41-42) and then determining that the relevant documents were not susceptible of dif therefore not ambiguous. 143, 150 (3d Cir. 1996) meanings, and

See In re New Valley Corp., 89 F.3d ("To decide whether a contract is

ambiguous, we do not simply determine whether, from our point of view, language is clear. Rather, we hear the prof of the that, from

parties and determine if there [are] objective indic

the linguistic reference point of the parties, the terms of the contract are susceptible of different meanings.") citations omitted). Bankruptcy Court's (internal the

Accordingly, the Court will aff and Final fication Orders.

III. The Debtor's Appeal from the Bankruptcy Court's Reconstitution of the Equity Committee and Fee Cap Orders

A.

Parties' Contentions Debtor contends that, despite the obvious evidence that

the Equity Holders were not entitled to receive any pursuant to the Plan and Indenture and, as a result Debtor's condition, would never be entitled to rece

stributions the

distributions, the Bankruptcy Court erroneously ordered the reconstitution of the Equity Committee, and increased the amounts

Shenango, 501 F.3d at 346. 10

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Debtors were required to pay times.

Equity Committee three

The Debtors contend that the Bankruptcy Court should not

have appointed the Equity Committee because there was little chance there would ever be a distribution to shareholders, and certain shareholders, like First Carolina Corp., had shown their willingness and ability to bear the expense of litigating arification Motion. The Debtors further contend that the

Bankruptcy Court should not have granted the Fee Cap Orders since the Equity Committee and s counsel had a very limited task, and "reasonable or

accordingly, the Fee Cap Orders do not ref justified" expenses. (D.l. 23 at 38.)

In response, the Equity Committee first contends that the Equity Holders were entitled to receive distributions pursuant to the Plan and Indenture, and Debtor's status as insolvent is not a dispositive barrier to the appointment of an ty committee.

The Equity Committee further argues that the relevant authority does not support the Debtors' contention that the willingness and ability of certain shareholders to bear the expense of litigating is a basis upon which to find that the Bankruptcy Court abused its discretion. The Equity Committee also contends that the

Bankruptcy Court's Fee Cap Orders should be affirmed because the Debtors have not established that the Bankruptcy Court abused its discretion.

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B.

Discussion

The decision to appoint an equity committee rests within the sound discretion the bankruptcy court. Exide Technologies v.

State of Wisconsin Invest. Bd., No. 02 1572-SLR, 2002 WL 32332000, at *2 (D. . Dec. 23, 2002). The Court finds that

Bankruptcy Court heard and fully considered the Debtor's arguments regarding the reconstitution of the Equity Committee (see, e.g., D.I. 18, Exh. I at 15-45) and, after reviewing part , contentions in light the applicable legal standard, ished that

the Court concludes that the Debtors have not est

the Bankruptcy Court's decision to reconstitute the Equity Committee was an abuse of discretion. Accordingly, the Court

will affirm the Bankruptcy Court's Equity Committee Order. Like the decision to appoint an equity committee, the Bankruptcy Court's decision to award fees is reviewed abuse of discretion. an

though the Bankruptcy Court initially

estimated that little work would need to be performed by counsel retained by t Equity Committee, it later considered the

briefing before it, including the written applications by counsel for increases, and the representations made by counsel at the The

hearings and concluded that the increases were warranted. Bankruptcy Court did not make a blanket authorization for increases without due consideration, but inst considered carefully

parties' positions apportioning certain fees for

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certain experts and disallowing other fees for work which the Bankruptcy Court found was "ill-advised.
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See Transcript of

Hearing before the Honorable Peter J. Walsh on June 26, 2007 (Bankr. D.I. 223). All totaled, a fee of $388,813 was awarded to

the Equity Committee for services rendered from June 2005 through March 2007, including the work of two law firms and two financial consultants. In these circumstances, the Court cannot conclude

that the Bankruptcy Court's Fee Cap Orders were an abuse of discretion. Orders. IV. CONCLUSION For the reasons discussed, the Court will deny the Equity Committee's Motion To Strike and affirm the Bankruptcy Court's Final and First Clarification Orders, the Equity Committee Order and the Fee Cap Orders. An appropriate Order will be entered. Accordingly, the Court will also affirm the Fee Cap

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