In re GFI COMMERCIAL MORTGAGE LLP, Debtor.
JOHN F. SAMPSON, Liquidator, Appellee. CLASS B LIMITED PARTNER COMMITTEE, Appellant,
ORDER AFFIRMING BANKRUPTCY COURT'S ORDERS
SUSAN ILLSTON, District Judge.
Now before the Court is an appeal by the Class B Limited Partner Committee from four orders entered by the Hon. Thomas E. Carlson of the Bankruptcy Court for the Northern District of California. The orders appealed are: (1) Order Denying Committee of Class B Limited Partner's Motion to Surcharge Liquidator for Investment Loss; (2) Order Approving Application for Approval of Compensation and Expense Reimbursement by Chapter 11 Liquidator; (3) Order Approving Application for Compensation and Reimbursement of Expenses for Wendel, Rosen, Black & Dean, LLP as Counsel for Liquidator; and (4) Order Denying Motion for Reconsideration. This Court has jurisdiction under 28 U.S.C. § 158(a). Upon careful consideration of the parties' papers, the Court AFFIRMS the bankruptcy court's orders for the reasons discussed below.
GFI Commercial Mortgage, L.P. ("GFI") was a partnership that owned commercial mortgages and issued bonds based on those mortgages. Appellant's Excerpts of Record on Appeal ("R.") at 128:21-27. GFI filed for chapter 11 bankruptcy on September 30, 1996. Two years later, the bankruptcy court issued an order confirming the debtor's second amended plan of reorganization ("Plan").
The Plan contains several provisions relevant to the parties' dispute. First, it provided that John F. Sampson was to serve as the Liquidator. R. at 42:23-26. According to the Plan, the Liquidator was to "be a fiduciary to the Reorganized Debtor and the holder of Allowed Claims and Allowed Interests." R. at 98:20-21. Further, it was "the duty of the Liquidator on behalf of the Reorganized Debtor to liquidate all of the assets of the Reorganized Debtor, and to resolve all claims against the Reorganized Debtor, in a manner that is reasonably intended in good faith to maximize recoveries by the holders of Allowed Claims and Allowed Interests, subject to all applicable terms and conditions of this Plan and the Restructured Loan Documents, and subject to the approval of the Class B Limited Partner Committee as provided elsewhere in this Plan." R. at 98:22-99:2. The Plan also contains a provision providing that the Liquidator may operate "free of any restrictions of the Bankruptcy Code or Bankruptcy Rules, other than those restrictions expressly imposed by th[e] Plan..." R. at 87: 9-11.
The Class B Limited Partners were the beneficiaries of the liquidation of the reorganized debtor's assets. According to the Plan, the Class B Limited Partner Committee ("Committee") was formed to represent the common interests of the Class B Limited Partners and consisted of three members who would initially serve three-year terms. R. at 121:17-27.
On June 29, 2006, the Liquidator filed an application for entry of final decree with the bankruptcy court. According to that application, the Liquidator had made more than $43 million in disbursements to creditors and the Class B Limited Partners. R. at 129:6-10. Moreover, the application stated that at the time, the Plan had been substantially consummated with the exception of a judgment against Henry Grausz, GFI's founder, and collection of a guaranty obligation from one Andrew Branch. R. at 129:13-17.
On May 24, 2010, the Liquidator moved to reopen the case because the Committee and the Liquidator could not agree on course of action for the judgment against Grausz. R. at 133:28-134:3 (Mot. to Reopen). The Liquidator also sought to reopen the case to retain counsel to assist in executing his duties and to pay himself and professionals employed by him as permitted by the Plan. Id. R. at 134:12-14. According to the Committee, the Liquidator wanted to sell the Grausz judgment to Grausz's wife for $5, 000, and the Committee objected because tens of thousands of dollars allegedly had been spent to obtain the judgment. Appellant's Opening Brief ("Comm. Br.") at 9.
On December 23, 2011, the Committee filed a motion to surcharge the Liquidator in the bankruptcy court for an investment loss of approximately $150, 000 in the ING Senior Income Fund ("ING Fund"), allegedly discovered only upon reopening the case. In its motion, the Committee argued that the Liquidator violated the Uniform Prudent Investment Act, Cal. Prob. Code § 16047 ("UPIA"). The Committee argued that the investment failed to meet the standard set forth by the UPIA because the investment was allegedly a risky, long-term, illiquid investment inappropriate when the estate was on the verge of closing. R. at 269:2-9. The Committee asserted that a Committee member - Dennis Carlston - suggested to the Liquidator that Carlston could obtain a significantly higher return on funds administered by the Liquidator. R. at 266:24-267:2. The Committee contended that the Liquidator declined Carlston's offer because the riskiness of the investment and the lack of a guaranteed rate of return only to "turn around and invest approximately $400, 000 in what we believe was an illiquid investment fund overseen by an offshore entity called ING" a month or two later. R. at 267:2-7. The Committee alleges that the bankruptcy case was on the verge of being closed at the time of this investment. R. at 267:10-11. Further, the Committee asserted that the Liquidator failed to secure the Committee's approval for the ING Fund. R. at 271:15-19.
In support of the Committee's motion, two Committee members - Nathan Gantcher and Dennis Carlston - submitted declarations claiming to be experts on a fiduciary's duty of care and alleging that the Liquidator's investment fell below the standard of care. R. at 294-298. According to their resumes, Gantcher holds an M.B.A. and has worked for investment companies since 1968 with the exception of a two-year period as a private investor (Dkt. No. 13, Ex. 1, at 4), and Carlston also holds an M.B.A., but has never been employed by a financial institution (Dkt. No. 13, Ex. 2, at 5). Carlston invests on his own, but does not hold any professional licenses. Id. He claims, "[w]ith one exception, I have been able to increase my net worth every month since the age of 12." Id.
In opposing the motion to surcharge, the Liquidator disputed the Committee's allegation that the Reorganized Debtor's estate was on the verge of closing in March of 2006 when the Liquidator invested the estate's cash in the ING Fund. R. at 316:6-8. According to the Liquidator, the estate was not in a condition to be closed until 2009. R. at 316:6-9. The Liquidator also argued that the investment met the UPIA's standard based on the facts and circumstances at the time of the investment. R. at 300:20-301:6. The Liquidator described his decision to invest in the ING Fund as a product of his personal research into the fund and consultation with Judy Mak, his licensed investment advisor at Wells Fargo Bank. R. at 318:9-319:28. The Liquidator allegedly investigated the fund's record, the nature of its portfolio, its liquidity, and the risks in the investment. R. at 318:14-17. In the Liquidator's view, the investment loss was caused by the 2008-2009 financial crash, which led to "a severe drop in liquidity" and a drop in the price of the ING Fund's shares. R. at 320:6-7. The Liquidator contended that the impending closure of the estate in 2009 prevented him from being able to sell the ING Fund shares at a more opportune time. R. at 320:7-11.
On January 27, 2012, the bankruptcy court held a hearing on the motion to surcharge the Liquidator. At the hearing, the court held:
With respect to the surcharge, ... I simply don't have competent evidence that there's been a breach of the duty of care.... we have a declaration by the liquidator that he relied on a qualified investment advisor. That's admissible evidence. We have conclusory declarations that he, in doing what he did, violated the standard of care. And there's been no showing that these witnesses are experts competent to testify as to what the duty of care is in that particular circumstance, and that this breached it.
Furthermore, this issue has been around, in time to get such evidence.... There was time to get a declaration from a qualified expert. It's not there. Our motion practice requires that a ...