IN RE PETTERS CO., INC.

425 B.R. 534

In re PETTERS COMPANY, INC., et al., Debtors (includes Petters Group Worldwide, LLC; PC Funding, LLC; Thousand Lakes, LLC; SPF Funding, LLC; PL Ltd., Inc.; Edge One LLC; MGC Finance, Inc., PAC Funding, LLC; Palm Beach Finance Holdings, Inc.).

Nos. 08-45257, 08-45258(GFK), 08-45326(GFK), 08-45327(GFK), 08-45328(GFK), 08-45329(GFK), 08-45330(GFK), 08-45331(GFK), 08-45371(GFK), 08-45392(GFK).

United States Bankruptcy Court, D. Minnesota.

March 10, 2010.

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James A. Lodoen, Jeffrey D. Smith, Lindquist & Vennum P.L.L.P., Minneapolis, MN, for Petters Co., Inc.

ORDER RE: DISPUTED ELECTION FOR TRUSTEE IN CASE OF DEBTOR PETTERS GROUP WORLDWIDE, LLC

GREGORY F. KISHEL, United States Bankruptcy Judge.

This group of cases is presently pending under Chapter 11.¹ The cases are being jointly administered pursuant to an order entered on October 22, 2008. Douglas A. Kelley has served as trustee in all of them, under an appointment by the United States Trustee that the Court approved in an order entered on February 26, 2009.²

The specific proceeding at bar was initiated by four related entities scheduled as creditors in the case of Debtor Petters Group Worldwide, LLC ("PGW")—Ritchie Capital Structure Arbitrage Trading, Ltd.; Yorkville Investment I, L.L.C.; Rhone Holdings II, Ltd.; and Ritchie Special Credit Investments, Ltd. (collectively "Ritchie"). On December 29, 2008, they had filed a request to the United States Trustee under 11 U.S.C. § 1104(b)(1), that a meeting of creditors be convened in that case alone, for the purpose of electing a trustee for that one debtor's estate.³ Under a notice filed on March 27, 2009, the United States Trustee scheduled a meeting of creditors for that purpose.

The notice was sent to creditors and other parties in interest. The U.S. Trustee convened the meeting on April 22, 2009; Six creditor groups or individual creditors appeared and participated. On the request of Ritchie and another creditor, procedures under the law governing a trustee election were initiated and a record was made.

After the meeting was adjourned, the U.S. Trustee filed a report of the election pursuant to FED. R. BANKR. P. 2003.⁴ In it, the U.S. Trustee noted that two parties appearing at the meeting had cast ballots in favor of Timothy D. Moratzka, Esq., a member of the panel of Chapter 7 trustees for this district. The U.S. Trustee concluded that the election was disputed within the meaning of FED. R. BANKR. P. 2003(d)(2); he cited the status of the balloting, the pendency of filed objections to claims in the PGW case, and positions voiced by various parties who had appeared. On his analysis, the U.S. Trustee submitted that an insufficient number of creditors that were qualified to vote under 11 U.S.C. § 702(a) had requested that an election be conducted; therefore, he opined, the "Voting Quorum threshold" of 11 U.S.C. § 702(b) had not been met. As a result, the U.S. Trustee maintained, "a valid election" had not "occurred," and "Douglas A. Kelley remained the chapter 11 trustee of PGW.

Ritchie then filed a motion pursuant to FED. R. BANKRP. 2003(d)(2), for resolution of the dispute reported by the U.S. Trustee. That motion came on for hearing. Appearances were noted as follows: James M. Jorissen, Esq., and Brian A. McAleenan, Esq., for Ritchie; Michael R. Fadlovich, Esq., and Robert B. Raschke, Esq., for the U.S. Trustee; James A. Lodoen, Esq., for the Chapter 11 trustee; Ronald R. Peterson, Esq., trustee for the Chapter 7 estates of Lancelot Investors Fund, LP, Lancelot Investors Fund II, LP, Colossus Capital Fund, Ltd., Colossus Capital Fund, LP, and Lancelot Investors Fund, Ltd., (those five, collectively, "Lancelot" or "the Lancelot entities"), plus RWB Services, LLC; David E. Runck, Esq., for the Committee of Unsecured Creditors in the Petters-related cases; and Ronn B. Kreps, Esq., for Palm Beach Finance Partners, L.P. and Palm Beach Finance II, L.P. (collectively, "the Palm Beach claimants"). This order addresses the dispute and disposes of Ritchie's motion.

GOVERNING LAW

Since PGW's case is pending under Chapter 11, the provisions of that chapter are the first source of legal governance for the election of a trustee. For the substance of that governance, however, another provision of the Bankruptcy Code is incorporated by reference:

"The election of a trustee shall be conducted in the manner provided in ... 11 U.S.C. §§ 702 (a), (b), and c ..."

11 U.S.C. § 1104(b)(1). In turn, §§ 702(a)-(c) provide:

(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 11 U.S.C. §§ 1726(a)(2), 726(a)(3), 726(a)(4), 752(a), 766(h), or 766(i) ...;

(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.

(b) At the meeting of creditors held under 11 U.S.C. § 341 ..., creditors may elect one person to serve as trustee in the case if election of a trustee is requested by creditors that may vote under subsection (a) of this section, and that hold at least 20 percent in amount of the claims specified in subsection (a)(1) of this section that are held by creditors that may vote under subsection (a) of this section.

(c) A candidate for trustee is elected trustee if—

(1) creditors holding at least 20 percent in amount of the claims of a kind specified in subsection (a)(1) of this section that are held by creditors that may vote under subsection (a) of this section vote; and

(2) such candidate receives the votes of creditors holding a majority in amount of claims specified in subsection (a)(1) of this section that are held by creditors that vote for a trustee.

FED. R. BANKR.P. 2007.1(b)(2) transplants more of Chapter 7's apparatus for trustee election,⁵ in the form of the following:

... a creditor is entitled to vote at a meeting if, at or before the meeting, the creditor has filed a proof of claim or a writing setting forth facts evidencing a right to vote pursuant to 11 U.S.C § 702(a) ... unless objection is made to the claim or the proof of claim is insufficient on its face.... In the event of an objection to the amount or allowability of a claim for the purpose of voting, unless the court orders otherwise, the United States trustee shall tabulate the votes for each alternative presented by the dispute and, if resolution of such dispute is necessary to determine the result of the election, the tabulations for each alternative shall be reported to the court.

FED. R. BANKR.P. 2003(b)(3).

These provisions set up two stages of hurdle for a party that seeks to seat a trustee by election. At each stage, creditors must meet certain requirements to participate. To distinguish between the stages, it is appropriate to use different verbs. A creditor would "qualify" to vote under § 702(a), i.e., establish a status as claimant with the qualities specified in the statute. Then a creditor would become "entitled" to vote under Rule 2003(b)(3), i.e., take the additional step of actually filing a proof of claim or equivalent writing, which then is not subject to a pending objection when the meeting of creditors is convened, if it had not made that filing already.

The language of the governing statutes and rules is cumbersome. It places the very devil into multiple details that are inherent in the position of each creditor that injects itself into the process. Ultimately, the legal tenability of the outcome from an election process can turn on involved creditors' qualification to request an election and their entitlement to vote.

There are several ways in which an analysis of the details could be organized. Here, it seems most appropriate to set out the relevant minutiae for each of the six creditors or creditor groupings that were active in the election process here.⁶ Then, each constituency's qualification can be determined, by applying § 702(a) to the characteristics of their claims.

As it turns out, the dispute in the PGW case is resolved with the tally to be made after that, in determination of whether an election was properly called. It is not necessary to get into the issue of entitlement to vote, or a tally of votes made by entitled creditors.

CHARACTERISTICS AND STATUS OF EACH CREDITOR'S CLAIM

A. Ritchie

1. The Schedule D filed for PGW's case⁷ included separate entries for the four entities that are collectively termed "Ritchie" in this decision. The total amount of the claims was recited at $225,256,470.76. The schedule identified the claims as "unliquidated" and "disputed." The entry also states: "Grant of security interest in trademarks of Polaroid on 9/19/08 and Financing Statement filed." The latter reference is to the Polaroid Corporation (which was one of PGW's subsidiaries), or a business entity related to it.

2. Ritchie later filed proofs of claim in PGW's case. There was a total of four: each one asserted a separate claim, different in amount, for one of the four creditor-entities. All four proofs of claim were filed on April 21, 2009.⁸ The total value of the claims recited on the face of these documents is $209,400,314.16.

3. On April 21, 2009, the Unsecured Creditors' Committee for the Petters-related cases filed an objection to Ritchie's claims.⁹ The Committee stated that it was objecting "for the purpose of determining Ritchie's eligibility to vote at the meeting of creditors scheduled for April 22, 2009..." It expressly challenged Ritchie's capacity to participate in a trustee election process, on the ground that Ritchie held an "interest materially adverse ... to the interest of creditors entitled to ... distribution" in PGW's case, within the meaning of 11 U.S.C. § 702(a)(2). The Committee

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