In re ETS of Wash., LLC

In re: ETS of Washington, LLC, Debtor.

No. 20-00397-ELG

United States Bankruptcy Court, District of Columbia

September 23, 2021

Chapter 7

MEMORANDUM DECISION AND ORDER RESOLVING DISPUTED CHAPTER 7 TRUSTEE ELECTION

ELIZABETH L. GUNN U.S. BANKRUPTCY JUDGE

Before the Court is the Report by the United States Trustee of Disputed Election of Chapter 7 Trustee Pursuant to 11 U.S.C. § 702 (ECF No. 152) (the "Election Report") and Motion to Recharacterize Claims of Debtor's Principals and Resolve Election (ECF No. 154) (the "Motion")^[1] filed by WCP Fund I LLC ("WCP") and DP Capital LLC ("DPC," and together with WCP, the "Moving Creditors"). As summarized in the Election Report, at the § 341 meeting of creditors (the "Meeting of Creditors"), the Moving Creditors requested an election of a trustee under 11 U.S.C. § 702. The two principals of the Debtor, Jason Porcier and Brian Miller (collectively, the "Principals"), objected to the election in both their individual capacity as creditors of ETS of Washington LLC (the "Debtor") and "on behalf" of the Debtor. The United States Trustee (the "UST") promptly filed the Election Report for resolution of the contested election by this Court. The Moving Creditors timely filed the Motion, asking this Court to (i) resolve the disputed chapter 7 trustee election in their favor and, as a result, (ii) find that Marc Albert was properly elected as the chapter 7 trustee. At the hearing held August 11, 2021 (the "Hearing"), the Court ruled from the bench denying the Motion and ordering that interim chapter 7 trustee William White continue as the chapter 7 trustee. This Memorandum Decision and Order memorializes the findings and conclusions as set forth by the Court at the Hearing.

Background

The history of this case prior to the disputed trustee election is neither short, nor simple. The record is filled with evidence of the highly contentious relationship between the Debtor and the Principals on the one hand and the Moving Creditors on the other. Only the history directly related and relevant to the disputed election is summarized herein. On September 28, 2020, the Debtor filed a voluntary petition for relief pursuant to Chapter 11 of Title 11 of the United States Code, 11 U.S.C. §§ 101-1532 (the "Bankruptcy Code")^[2] on the eve of a foreclosure sale scheduled by one or both of Moving Creditors against the Debtor's real property located on Foxhall Road (the "Property"). On February 20, 2021, the Debtor filed an adversary complaint against the Moving Creditors and 1Sharpe Opportunity Intermediate Trust ("1Sharpe") raising numerous causes of action related to and arising out of the financing and purchase of the Property. On May 4 2021, after an evidentiary hearing, the Court entered an order granting the relief from the automatic stay as to the Property to DPC and WCP as servicer for 1Sharpe. DPC foreclosed upon the Property in May 2021.

On May 10, 2021, DPC and WCP as servicer for 1Sharpe filed a motion to convert the case to a chapter 7 and to shorten notice thereon. Mot. Convert Case, ECF No. 107. After an evidentiary hearing, on May 24, 2021, the Court entered an order converting the case to chapter 7. ECF No. 122. Pursuant to normal Court procedures, William White was appointed interim trustee and the initial Meeting of Creditors was scheduled to be held virtually on July 1, 2021. Id. After a continuance, the details of which are not material hereto the initial Meeting of Creditors was convened on July 8, 2021, at which time the Moving Creditors indicated their intent to call for the election of a chapter 7 trustee. ECF No. 148. Upon the request of the Principals, the Meeting of Creditors was further continued until July 14, 2021 to allow the Debtor to obtain counsel to represent it during the election. ECF No. 151. The continued Meeting of Creditors was convened on July 14, 2021,^[3] at which only counsel for Moving Creditors and Principals, pro se, appeared, and once again the Moving Creditors called for an election. The UST presided over the election and noted on the record that the Principals were insiders but allowed all parties to state their positions on the record. Mot. Resolve Election, Ex. A at 11:6-12, ECF No. 154. During the course of the election, the Principals objected both to (i) the removal of Mr. White as the trustee, and (ii) the Moving Creditors' voting eligibility in a § 702 election. Preserving the objections, the UST held the election, at which time counsel for the Moving Creditors voted for Mr. Albert and the Principals, pro se, voted for Mr. White. See Report of Disputed Election, ECF No. 152, at ¶¶ 11-12.

Due to the contested nature of the election, the UST, as required by Federal Rule of Bankruptcy Procedure 2003(d)(2) (the "Bankruptcy Rules," and each individually, a "Bankruptcy Rule"), promptly filed the Election Report summarizing the proceedings, objections, and including a transcript excerpt. See id. The UST reported that they were unable to certify the election of Mr. Albert as the chapter 7 trustee due to the Principals' objections and questions regarding the status of the Moving Creditors as eligible creditors under § 702 and Bankruptcy Rule 2003. Id. at 8. The Moving Creditors timely filed the Motion asking this Court to approve the election of Mr. Albert as the chapter 7 trustee in accordance with Bankruptcy Rule 2003. See Mot. Resolve Election, ECF No. 154. The Motion also argued that the Principals, as insiders, were ineligible to vote or to raise objections to the election process. While no response to the Moving Creditors' Motion was filed, at the Hearing the Court heard the report of the UST, the arguments of the Principals, and the arguments of counsel for the Moving Creditors. Mr. White appeared at the hearing but did not take a position on the election.

Analysis

I. Chapter 7 Trustee Elections

In a chapter 7 case, either upon the filing of a voluntary petition or entry of an order converting from another chapter, a chapter 7 trustee is appointed on an interim basis. 11 U.S.C. § 701(a)(1). The interim trustee is tasked with the administration of the debtor's bankruptcy estate and has all the rights and duties of a trustee unless and until either (i) an election is requested and a permanent chapter 7 trustee is selected; or (ii) as is the case in the vast majority of the cases, no election is held, and the interim trustee then continues to serve as the chapter 7 trustee. 11 U.S.C. §§ 702(b) and (d).

Chapter 7 trustee elections are rare. The Bankruptcy Code establishes clear requirements for the parties and procedures involved in an election. Section 702(a) sets forth the limited scope of creditors who are entitled to vote in a trustee election. Specifically, it states:

a) A creditor may vote for a candidate for trustee only if such creditor -

(1) holds an allowable, undisputed, fixed, liquidated, unsecured claim of a kind entitled to distribution under section 726(a)(2), 726(a)(3), 726(a)(4), 752(a), 766(h) or 766(i) of this title;

(2) does not have an interest materially adverse, other than an equity interest that is not substantial in relation to such creditor's interest as a creditor, to the interest of creditors entitled to such distribution; and

(3) is not an insider.

11 U.S.C. § 702(a). Bankruptcy Rule 2003(b) clarifies, inter alia, that in addition to the requirements of § 702(a), an otherwise qualifying creditor must have filed a proof of claim or a writing evidencing the creditor's right to vote prior to any election. See Fed. R. Bankr. P. 2003(b).

Upon the determination that the creditors seeking to hold an election are eligible to vote, the election involves a two-step process. First, creditors representing 20 percent in amount of all filed claims against the Debtor that are eligible to vote under § 702(a) may call for a trustee election to be presided over by the UST. 11 U.S.C. § 702(b). The UST then conducts the election and tallies the votes. Once a vote is held, a chapter 7 trustee candidate is elected if both (1) creditors representing at least 20 percent of the claims eligible to vote actually vote; and (2) the candidate receives the votes of creditors holding a majority in amount of claims of the creditors who took part in the election. See 11 U.S.C. § 702(c). However, if at any point during the election process a party raises objections to, or disputes the election of the chapter 7 trustee, the UST must file a report outlining the nature of the dispute for the bankruptcy court to resolve the election. Fed. R. Bankr. P. 2003(d)(2).

To resolve a disputed chapter 7 trustee election, a bankruptcy court must first determine whether the creditors requesting the election qualified as creditors able to vote in and, as a result, call for an election under 11 U.S.C. § 702(a). The requirements set forth in § 702(a) are conjunctive and failing to meet any one element will disqualify a creditor from eligibility to both call for and vote at an election of a chapter 7 trustee. Because the Court finds that the Moving Creditors fail to meet all of the elements of § 702(a) and, therefore, could not call for an election, any issues raised regarding the voting or process of the election in this case are moot.

II. The Principals' Standing to Vote and Object to the Chapter 7 Trustee Election

On the eve of the election, the Principals each filed claims asserting unsecured claims against the Debtor. However notwithstanding the filed claims, it is undisputed that as insiders^[4] of the Debtor, the Principals were not eligible to either call for or vote at a chapter 7 trustee election. 11 U.S.C. § 702(a)(3). While the UST recorded the votes of the Principals as part of the Election Report, even if an election was appropriately called in this case...