In re Sillerman

605 B.R. 631

IN RE: Robert Francis Xavier SILLERMAN aka Robert F.X. Sillerman, aka Robert F. Sillerman, aka Robert X. Sillerman, Debtor.

Case No. 17-13633 (MKV)

United States Bankruptcy Court, S.D. New York.

Signed October 8, 2019

CULLEN and DYKMAN LLP, Counsel for the Official Committee of Unsecured Creditors, 100 Quentin Roosevelt Blvd., Garden City, New York 11530, By: Jil Mazer-Marino, Esq., Elizabeth Usinger, Esq.

ROSEN & ASSOCIATES, P.C., Counsel for the Debtor, 747 Third Avenue, New York, New York 10017, By: Sanford P. Rosen, Esq., Paris Gyparakis, Esq.

SULLIVAN & CROMWELL LLP, Counsel for ESFX Holdings LLC, 125 Broad Street, New York, New York 10004, By: Leonid Traps, Esq.

VEDDER PRICE, Counsel for React Presents, Inc., Clubtix, Inc., Lucas King, and Jeffrey Callahan, 1633 Broadway, 31^st floor, New York, New York 10019, By: Kevin J. Etzel, Esq.

MONTGOMERY McCRACKEN, Counsel for Luxury Properties, LLC, Ultimate, Luxury Properties, LLC, Lance Lundberg, and, Temenos Villa 22, LLC, 437 Madison Avenue, New York, New York 10022, By: Edward L. Schnitzer, Esq.

REID COLLINS TSAI LLP, Counsel for Dean Ziehl, as Litigation, Trustee, of SPX Litigation Trust, 810 Seventh Avenue, Suite 410, New York, New York 10019, By: Yonah Jaffe, Esq.

SEWARD & KISSEL LLP, Counsel for Deutsche Bank Trust Company, Americas, One Battery Park Plaza, New York, New York 10004, By: Catherine V. LoTempio, Esq.

IZOWER FELDMAN, LLP, Counsel for OPW and Brett Torino, 11 Broadway, Suite 615, New York, New York 10004, 1325 Franklin Avenue, Suite 255, Garden City, New York 11530, By: Ronald D. Lefton, Esq.

UNITED STATES DEPARTMENT OF JUSTICE, Counsel for the Office of the United States Trustee, 201 Varick Street, Suite 1006, New York, New York 10014, By: Richard C. Morrissey, Esq.

STATE OF NEW YORK OFFICE OF THE ATTORNEY GENERAL, Counsel for the New York State Department, of Taxation & Finance, 28 Liberty Street, New York, New York 10005, By: Leo V. Gagion, Esq.

MEMORANDUM OPINION AND ORDER GRANTING MOTION TO APPOINT A CHAPTER 11 TRUSTEE

MARY KAY VYSKOCIL, UNITED STATES BANKRUPTCY JUDGE

The Committee of Unsecured Creditors (the "Committee") has moved for an order appointing a chapter 11 trustee in the case of Robert Francis Xavier Sillerman (the "Debtor") or, alternatively, converting the chapter 11 case to a chapter 7 case (the "Committee's Motion"). [ECF No. 404]. In support of the its Motion, the Committee submitted a declaration of Jil Mazer-Marino [ECF No. 406] (the "Mazer-Marino Decl.") and a declaration of Neil Bivona [ECF No. 405] (the "Bivona Decl."). Two groups consisting of eight separate creditors joined the Committee's Motion.¹

The Debtor opposed the Committee's Motion [ECF No. 425] (the "Opposition") and submitted a declaration of the Debtor Robert Sillerman in opposition to the Committee's Motion. [ECF No. 426] (the "Sillerman Decl.") The Committee filed a reply memorandum of law in further support of its Motion [ECF No. 437] and a reply declaration of Jil Mazer-Marino [ECF No. 462] (the "Mazer-Marino Reply Decl.").

I. PROCEDURAL BACKGROUND

This case was commenced against the Debtor on December 26, 2017 by four creditors² who filed an involuntary petition under chapter 7 of the Bankruptcy Code. [ECF No. 1]. The Debtor consented to the entry of an order for relief, but moved to convert the chapter 7 case to one under chapter 11. [ECF No. 6]. An Order for Relief under chapter 11 was entered on March 1, 2018. [ECF No. 26]. Soon thereafter, the Debtor filed his schedules of assets and liabilities [ECF No. 29] (the "Schedules"), statement of financial affairs [ECF No. 30] (the "SOFA"), creditor matrix [ECF No. 33], and his affidavit pursuant to Local Bankruptcy Rule 1007-2. [ECF No. 37] (the "1007-2 Affidavit").

After the Court twice granted motions by the Debtor to extend his exclusivity period for filing a plan, see ECF No. 98 and 121 ("Motions to Extend Exclusivity"), on October 31, 2018, the Debtor filed his first proposed plan of reorganization. [ECF No. 132] (the "First Plan"). Two months later, the Debtor filed the disclosure statement related to his First Plan. [ECF No. 144]. Shortly thereafter, the Debtor filed an amended disclosure statement relating to his First Plan. [ECF No. 173]. The First Plan and disclosure statements contemplated full satisfaction of claims against the estate, which the First Plan provided would be made possible by the large returns projected to be generated once the Debtor was able to secure financing to invest in certain of his affiliated entities. Confirmation of the First Plan was conditioned on the Debtor receiving financing and an entry of a Final Order settling several lawsuits against the Debtor. See First Plan at 18-19. The Debtor moved for approval of his Disclosure Statement in January 2019 [ECF Nos. 175 and 176], but subsequently adjourned the hearing on five different occasions. See ECF Nos. 199, 255, 293, 345, and 392. A hearing on the Disclosure Statement relating to the First Plan has never been held.

Shortly after the Debtor filed the First Plan, the Petitioning Creditors moved for the appointment of an examiner [ECF No. 136] (the "Examiner Motion").³ The moving creditors requested an examiner due to the "lack of oversight" over the estate and the Debtor's failure to move the case forward. See Examiner Motion, at ¶ 2. The creditors alleged, in part, that the lack of independent managerial oversight allowed the Debtor to avoid disclosing the true nature and value of his assets and that the Debtor used multi-layered transactions involving complicated corporate structures to make his assets difficult to find. See Examiner Motion, at ¶¶ 10 and 12. The creditors also alleged that the Debtor delayed moving the case forward, as evidenced by his First Plan, which provided only "an amorphous description of some theoretical financing source." See Examiner Motion, at ¶ 43.

During the same time frame as the Motions to Extend Exclusivity and the Examiner Motion, members of the creditor body repeatedly requested, and the US Trustee ultimately on January 11, 2019 appointed, a Committee of Unsecured Creditors. [ECF No. 177]. Once the Committee was in place, the Examiner Motion was subsequently withdrawn. [ECF No. 215].

The Committee promptly began to seek information from the Debtor. After the Debtor announced that his original reorganization goals were no longer viable, the Court again entered an order granting a further motion by the Debtor to extend his exclusivity period through March 9, 2019 for filing an amended plan. [ECF No. 224].

Within two months of being appointed, the Committee retained professionals and filed a motion for an order restricting the Debtor's use of estate property and requiring the Debtor to submit periodic disclosures concerning his affiliated entities [ECF No. 246] ("the Motion to Restrict"). The Motion to Restrict was predicated on information from the Debtor's Monthly Operating Reports (the "MORs"), reflecting that there had been transfers to insiders, payments to non-retained professionals, unauthorized sale of estate property, and failure to file financial reports. See Motion to Restrict, at ¶¶ 28-47. The Committee and the Debtor negotiated a Stipulation resolving the Motion to Restrict in which the Debtor agreed, among other things, to abide by a monthly budget, refrain from making certain transfers to insiders, and comply with deadlines for filing financial reports. See ECF No. 270. The Court entered an order approving the Stipulation. [ECF No. 277] (the "Restrict Order").

The Committee also moved for an order establishing procedures for monthly compensation and expense reimbursements for all professionals retained pursuant to Court order. [ECF No. 217]. The Court entered an Interim Fee Order to resolve the initial fee application. [ECF No. 305] (the "Interim Fee Order"). The Interim Fee Order directed the Debtor to remit, within three days, $150,000 to his attorney, who would then disburse a portion of those funds to professionals retained by the Committee. The Debtor and the Committee ultimately agreed to a protocol for payment of professional fees and expenses. Based on the agreed protocol, the Court entered a Final Order Establishing Procedures for Monthly Compensation of Professionals. [ECF No. 334].

During August 2019, a series of motion were filed. First, the Debtor moved for authorization to incur post-petition financing [ECF No. 394] (the "DIP Motion"). The DIP Motion contemplates a $14,390,000 loan to the Debtor, $12,500,000 of which would be allocated to settle the claims of two secured creditors.⁴ The DIP Motion is not based on a commitment by a lender to provide DIP financing, but rather attaches only a non-binding "letter of intent" and seeks authorization to make up to $250,000 in expense reimbursements to the putative lender in anticipation of a loan commitment.

Shortly thereafter, the Committee filed the pending Motion to Appoint a Trustee, or alternatively, convert the chapter 11 case to one under chapter 7 [ECF No. 404]. The Committee also filed a liquidating chapter 11 plan [ECF No. 430] ("the Committee's Liquidating Plan") and a disclosure statement related to that plan [ECF No. 432]. Subsequently, the Committee filed an amended plan of liquidation [ECF No. 498] and an amended disclosure statement related to that plan. [ECF No. 499].

Simultaneous with its opposition to the Committee's Motion, the Debtor filed a motion to retain a tax accountant nunc pro tunc to the date of the Order for Relief [ECF No. 433] (the "Retention Application"). Shortly before the Committee's Motion was scheduled for a hearing, the Debtor submitted a modified plan of reorganization [ECF No. 454] (the "Modified Plan") and a related modified disclosure statement [ECF No. 455] (the "Modified Disclosure Statement").

While the Committee's Motion was pending, the Debtor filed: (1) a declaration in response to Committee's motion for order compelling the Debtor to comply with fee payment and...