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Liberty Lobby Bankruptcy — Motion for the Appointment of a Trustee (6/11/99)


In re:

Liberty Lobby, Inc.


Case No. 98-01046
Chapter 11

Motion of United States Trustee for the Appointment of a Chapter 11 Trustee

The United States Trustee represents that:

1. This Chapter 11 case was commenced by the filing of a voluntary petition on May 13, 1998. The debtor continues to operate as a debtor in possession with the rights, powers and duties as enumerated in 11 U.S.C. section 1107.

2. The Court has jurisdiction of this proceeding pursuant to 28 U.S.C. section 157 and 28 U.S.C. section 1334.

3. The United States Trustee files this motion in furtherance of his duties and responsibilities pursuant to 28 U.S.C. section 586 and 11 U.S.C section 307.

4. The grounds for the appointment for a Chapter 11 Trustee are set forth in 11 U.S.C. 1104(a)(1) and (2). Under (a)(1) it includes fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case…. The cause as defined in 1104(a)(1) is not limited to those actually enumerated. See, for e.g., In re Sharon Steel Corp., 86 B.R. 455 (Bktcy. W.D. Pa 1988). Moreover, 11 U.S.C. 1104(a)(2) also provides for the appointment of a trustee if, inter alia, it is in the interests of creditors….

5. The debtor has acknowledged in its response which was filed with the Court on March 23, 1999 to the Objection to the Debtor’s Disclosure Statement filed by Legion for the Survival of Freedom, Inc., its failure to disclose material information both in the debtor’s schedules and statements and in the debtor’s monthly reports, all of which were filed under penalty of perjury. This information includes:

a. Transfers in the amount of $370,000 to a related non-debtor entity, Foundation for Economic Liberty, Inc., made pre-petition and omitted from the statement of financial affairs. See Debtor’s Response for Objection to Debtor’s Disclosure Statement at page 2. The apparent reason for these transfers was to limit the availability of cash in the debtor’s bank account because of an outstanding judgment.

b. Post-petition loans to the debtor from related non-debtor entities in excess of $350,000 and repayments thereof, which were not disclosed on the debtor’s monthly reports and for which no court approval was obtained. Id. at pages 3, and 4. Notwithstanding the debtor’s representation that these loans would be subordinated to all creditors both pre and post petition, it raises serious questions at to the accuracy of the debtor’s monthly operating reports and the ability of parties-in-interest to determine the financial condition of the debtor post-petition. This prevents creditors from having sufficient financial information to make an informed decision in voting on the plan.

c. Pre-petition payment of $10,000 on May 7, 1998 to an attorney, Joseph Izen, not included in the debtor’s schedules and statements. Id. at page 5. This payment was allegedly in connection with the representation of the debtor in an appeal of the California judgment in favor of the Legion for the Survival of Freedom. While this appellate matter has been on-going post-petition, upon information and belief, no employment application pursuant to section 327 of the Bankruptcy Code has ever been filed with the Court.

d. Post-petition payments to attorneys, which were later recovered, that are not disclosed in answer to question number 16, payments to professionals, on the debtor’s monthly reports filed for May and July of 1998. Id. at pages 4, 5.

6. In the Motion For The Appointment Of A Chapter 11 Trustee filed by the Legion for the Survival of Freedom, Inc. it includes documentation of the debtor’s ownership of real property in Kentucky that is not listed in the debtor’s scheduled assets. See page 2 and attached letter of the Motion For The Appointment Of A Chapter 11 Trustee.

7. Upon information and belief, in August of 1998 the debtor was the recipient of a $100,000 loan from the Committee to Defend Liberty Lobby, Inc., (Committee). The debtor apparently repaid the $100,000 to the Committee on March 9, 1999. The money was eventually returned to the Debtor in April, of 1999. None of these transactions were ever the subject of notice and Court approval nor were they disclosed in any of the respective monthly operating reports.

8. The conduct of the debtor as set forth above raises serious questions concerning the veracity of the information contained in the schedules and statements as well as the monthly operating reports that have been filed to date. [W]hen a debtor fails to maintain complete and accurate financial records, or fails to substantiate undocumented transactions, so that there appears to be a confusion in the debtor’s accounting system, the courts have viewed these facts as gross mismanagement and have directed the appointment of a Chapter 11 trustee. In re McCorhill Pub., Inc., 73 B.R. 1013, 1017 (Bkrtcy. S.D.N.Y. 1987) (citations omitted). With a disclosure statement and plan pending the omissions that have been made in the schedules and statements and the monthly financial reports have deprived the creditors of having accurate financial information on which to rely in evaluating the merits of the pending plan. This is further grounds for the appointment of a Chapter 11 Trustee pursuant to 11 U.S.C. section 1104(a)(1) and (2).

9. Inasmuch as the grounds for this motion are set forth herein, it is requested that the requirement for a separate memorandum of points and authorities be waived.

WHEREFORE, the United States Trustee respectfully requests that the Court enter an order directing the appointment of a Chapter 11 Trustee and such other and further relief as may be deemed just and proper.

Respectfully requested,
W. Clarkson McDow, Jr.
United States Trustee
Region Four


Dennis J. Early
Assistant U.S. Trustee
Office of the United States Trustee
115 S. Union Street, Suite 210
Alexandria, VA 22314
(703) 557-7176

[June 11, 1999]