Ampal - American Israel Corporation

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re: 	:
: 	Chapter 11
AMPAL-AMERICAN ISRAEL CORPORATION, : 	Case No. 12-13689 (SMB)
:
Debtor. 	:
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MEMORANDUM DECISION AND ORDER DIRECTING
THE APPOINTMENT OF A CHAPTER 11 TRUSTEE
A P P E A R A N C E S:
BROWN RUDNICK LLP
Attorneys for the Official
Committee of Unsecured Creditors
7 Times Square
New York, NY 10036
Edward S. Weisfelner, Esq.
Daniel J. Saval, Esq.
Of Counsel
KASOWITZ, BENSON, TORRES & FRIEDMAN LLP
Attorneys for Yosef A. Maiman and Merhav (M.N.F.) Limited
1633 Broadway
New York, New York 10019
David M. Friedman, Esq.
Daniel A. Fliman, Esq.
Nii-Amar Amamoo, Esq.
Of Counsel
COLE, SCHOTZ, MEISEL,
FORMAN & LEONARD, P.A.
Attorneys for the Ampal Non-Independent
Officers and Directors
900 Third Avenue, 16th Floor
New York, NY 10022
Michael D. Sirota, Esq.
Steven L. Klepper, Esq.
Of Counsel
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CLARICK GUERON REISBAUM LLP
Attorneys for the Ampal Independent Directors
40 West 25th Street, 12th Floor
New York, NY 10010
Nicole Gueron, Esq.
Isaac B. Zaur, Esq.
Of Counsel
TRACY HOPE DAVIS
United States Trustee
33 Whitehall Street, Suite 2100
New York, New York 10004
Andrew D. Velez-Rivera, Esq.
Of Counsel
STUART M. BERNSTEIN
United States Bankruptcy Judge:
This case involves numerous disputes regarding, inter alia, the control of the debtor,
Ampal-American Israel Corporation (“Ampal” or the “Debtor”), pending the confirmation of the
plan. The warring factions include the Official Committee of Unsecured Creditors (the
“Committee”), Yosef Maiman, Ampal’s controlling shareholder, president and chairman of its
board of directors (the “Board”), the other seven directors and certain non-director officers. The
Committee now asks me to approve a corporate governance stipulation that Maiman and the
United States Trustee oppose, and the directors support without much fervor. For the reasons
that follow, the Court declines to approve the stipulation and directs the United States Trustee to
appoint a chapter 11 trustee.
BACKGROUND
Ampal is a public New York corporation founded in 1942. It does not operate, and is
primarily engaged in the business of acquiring interests in businesses located in the State of
Israel or that are Israel-related. Ampal’s subsidiaries have not filed for chapter 11 protection in
the United States or commenced restructuring proceedings outside of the United States.
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Maiman, the president and chairman, directly or indirectly owns or controls approximately 62%
of Ampal’s common stock. Excluding Maiman, there are four non-independent directors and
three independent directors. These seven will be referred to collectively as the Directors. Ampal
has no secured debt; its principal obligations consist of three series of debentures which currently
aggregate approximately $235 million.
Ampal filed this chapter 11 petition on August 29, 2012. The United States Trustee
appointed a Committee consisting of the trustees of the three series of debentures. Following a
good deal of skirmishing between the Debtor and the Committee, the Committee proposed a
plan, and the Court approved the Committee’s modified disclosure statement by order dated
February 26, 2013. No confirmation hearing has been scheduled because the solicitation process
cannot begin until the Israeli authorities grant permission to solicit acceptances and rejections in
Israel. The proposed plan is a complicated document, but for present purposes, it is sufficient to
say that while existing equity will retain some of its economic interest in Ampal, the majority of
the economic interest and control of the company will pass to the creditors (i.e., the debenture
holders) who will become preferred shareholders.
This case has been marked by strife between the Committee on the one hand and the
Debtor and Maiman on the other. The Directors have been drawn into the battle. All sides have
traded charges which are unnecessary to detail. One recent example will suffice. By order dated
January 22, 2013, the Court awarded interim fees to the Committee’s counsel (Brown Rudnick
LLP) in the approximate amount of $634,000 and expenses in the approximate amount of
$16,000. By separate order also dated January 22, 2013, the Court awarded the Debtor’s counsel
(Bryan Cave LLP) approximately $700,000 in interim fees and $10,000 in interim expenses.
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After the awards were entered, Ampal’s counsel advised Brown Rudnick that the
Debtor’s board had only authorized payment of $250,000 to each firm. According to the Debtor,
it did not have the cash flow to pay the entire awards. On January 31, 2013, Brown Rudnick
submitted a proposed order to show cause by which it sought to hold the Directors and Maiman
in contempt, compel the immediate payment of the interim award and reimburse Brown
Rudnick’s reasonable costs and expenses, including counsel’s fees. The Court interlineated,
somewhat inartfully but clear to everyone concerned, that it would also consider the appointment
of a chapter 11 trustee. (See Order to Show Cause, signed Jan. 31, 2013 (ECF Doc. # 167).)
All of the Directors as well as Maiman filed objections to Brown Rudnick’s motion. The
Directors also argued for the appointment of a chapter 11 trustee which would allow them to
resign immediately and extricate themselves from what they perceived to be an impossible
position. Apparently seeking to avert this result, the debenture holders formed a selection
committee for the purpose of locating suitable candidates to recommend to the Debtor as
additional directors and as Chief Restructuring Officer (the “CRO”). The selection committee
chose Shlomi Kelsi as CRO and Moshe Ingbir and Kelsi as their candidates for directors
(collectively, the “Replacement Directors.”) The Court has received their curricula vitae. Kelsi
is a CPA in Israel, Ingbir is a lawyer in Israel, and both appear to have substantial experience in
the banking and financial services industry in Israel.
These various efforts led to a stipulation (the “Original Stipulation”) among the
Committee, the Debtor, the Directors and certain non-director officers (who, collectively with
the Directors, are referred to as the “Individual Parties”). Maiman did not join. The Original
Stipulation was intended to resolve the fee dispute as well as the corporate governance issues.
Among other things, (1) the Debtor agreed to provide the Committee and its counsel with cash
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flow forecasts on a regular basis, (2) the Individual Parties would resign as directors and/or
officers within five days of the effective date of the stipulation,1 (3) prior to their resignation the
Directors would take the necessary action to appoint Shlomi Kelsi as CRO and appoint Moshe
Ingbir and Kelsi as Replacement Directors, and (4) then reduce the number of directors to three ‒
Ingbir, Kelsi and Maiman. The Original Stipulation further stated that the CRO and the new
directors would be Exculpated Parties under an amended version of the Committee’s plan.
When presented with the Original Stipulation, the Court questioned the propriety of the
corporate governance activities it was being asked to approve, and requested briefing. Toward
that end, the Court signed an order to show cause, scheduled another hearing and directed that
briefs be filed on the issues identified by the Court. (See Order to Show Cause, signed Mar. 20,
2013 (ECF Doc. # 227).) Shortly thereafter, the Committee, the Debtor, the Individual Parties
and Maiman entered into a stipulation, which the Court so-ordered, that resolved the fee payment
and cash flow reporting issues and withdrew the request for contempt and other sanctions. This
still left the corporate governance issues.
At around the time that the briefs requested by the Court were due, the parties (other than
Maiman) entered into a revised stipulation (the “Revised Stipulation”) in an attempt to resolve
the Court’s concerns with the corporate governance aspects of the Original Stipulation.2
According to the Committee, I am no longer being asked to approve the corporate governance
actions because they have already occurred. The historical information in the Revised
1 	The Original Stipulation provided that Erez Meltzer was not resigning from his position(s) with Gadot
Chemical Tankers & Terminals Ltd. and its subsidiaries.
2 	A copy of the Revised Stipulation is annexed as Exhibit A to the Brief of the Official Committee of
Unsecured Creditors of Ampal-American Israel Corporation in Response to the Court’s Order to Show Cause, dated
March 29, 2013 (“Committee’s Brief”) (ECF Doc. # 232).
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Stipulation states the Individual Parties have tendered their resignations effective on the earlier
of the effective date of the stipulation or April 9, 2013; the Board has approved the appointment
of Kelsi as CRO and Ingbir and Kelsi as “Replacement Directors;” and the Board has reduced
the number of Directors to three, as a result of which the new Board will consist of the
Replacement Directors and Maiman. Notwithstanding the Committee’s characterization of the
Revised Stipulation, its effectiveness depends on the Court so-ordering it. Thus, the Revised
Stipulation substitutes ex post approval for ex ante approval, but still requires Court approval.
In addition, and among other things, the Revised Stipulation provides that the Committee
will modify its plan to include the Individual Parties as Exculpated Parties for actions taken or
omitted to be taken in good faith from March 19, 2013 through the resignation date with respect
to a variety of actions, including all of the corporate governance actions reflected in the Revised
Stipulation. (Revised Stipulation at ¶ 2.) The Individual Parties agree to consult with counsel to
the Committee and the Debtor prior to the Debtor or any of its controlled subsidiaries or affiliates
taking any action outside of the ordinary course of business. (Id. at ¶ 3.) The Directors will not
approve or permit an amendment to the Debtor’s or its subsidiaries’ governance documents,
other than the amendments to the by-laws contemplated in the Revised Stipulation, without the
prior written consent of the Committee. (Id. at ¶ 6.) Finally, if the Court does not approve the
Revised Stipulation by April 9, 2013, the Committee will not object to the appointment of the
chapter 11 trustee provided that no party will object to the appointment of Kelsi as the chapter 11
trustee. (Id. at ¶ 8).
The Committee contends that the Revised Stipulation offers a better alternative to the
appointment of a chapter 11 trustee. The appointment of a chapter 11 trustee will add to the
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administrative insolvency of the estate.3 (See Committee’s Brief at ¶ 8.) The Committee also
questions a chapter 11 trustee’s ability to immediately and effectively operate Israeli businesses
given their emergent needs. Finally, Maiman has conflicts with the Debtor, 4 and the
appointment of Kelsi and Ingbir will strip him of control over the Debtor and its operating
subsidiaries.
In addition to the Committee, three parties submitted pleadings in response to the Court’s
order to show cause. Not surprisingly, Maiman opposes the Revised Stipulation. He argues, in
the main, that the Original Stipulation (and hence, the Revised Stipulation), strips him of his
rights as the controlling shareholder of Ampal with the result that he will call a special meeting
and remove the Replacement Directors.5 He also contends that the selection of the Replacement
Directors did not comply with Ampal’s by-laws. Finally he argues that a chapter 11 trustee
should be appointed to ensure the independence and disinterestedness of the Debtor’s
management. (See Objection of Yosef A. Maiman and the Controlling Shareholders to
Stipulation and Agreed Order Concerning Changes to the Debtor’s Corporate Governance, Mar.
29, 2013 (ECF Doc. # 231).)
The United States Trustee objects to the Revised Stipulation contending that it
circumvents the appointment of a chapter 11 trustee which is the appropriate way to resolve the
3 	The Committee will have to fund these increased administrative expenses in order to confirm its plan.
4 	By Stipulation and Agreed Order, dated Jan. 31, 2013 (ECF Doc. # 168), the Committee was granted
standing and authority to bring proceedings against Maiman on behalf of a subsidiary of the Debtor to enforce a $20
million guarantee.
5 	In reply, the Committee confidently asserts that Maiman lacks the money to meet the requirements imposed
on a public corporation, but even if he had the money, he could never accomplish anything before the effective date
of the plan.
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issues. (See United States Trustee’s Objection to Proposed Stipulation and Agreed Order, and
Response to Order to Show Cause, dated Mar. 29, 2013 (ECF Doc. # 234).)
Troubling is the response provided by the Individual Parties, who are parties to the
Revised Stipulation. (See Memorandum of Certain Individual Directors and Officers of Ampal-
American Israel Corporation in Support of Application by Unsecured Creditors’ Committee for
Entry Of Stipulation Concerning Governance Transition, dated Mar. 29, 2013 (ECF Doc. #
233).) They begin by stating that they find themselves in an “untenable position” as “fiduciaries
of an entity paralyzed by discord between its controlling shareholder and CEO and the
[Committee] whose eventual control of the Debtor is now a foregone conclusion.” (Id. at ¶ 1.)
They have been “caught between the warring camps” of the Committee and Maiman. (Id. at ¶
4.) The Committee has threatened them with litigation whenever the Committee believed that
they “were slow to accommodate the Committee’s views on how the Debtor should be
governed.” (Id. at ¶ 5.) The Committee has attempted to bully the Individual Parties into
“precipitous action,” (id. at ¶ 6), and has brought contempt proceedings against the Directors
when they failed to satisfy the Brown Rudnick fee award only eight days after it was entered.
(Id. at ¶ 7.)
They also state that the Debtor has reached a crisis point. It is in a “precarious financial
situation” that “requires leadership that can exercise unfettered business judgment; this has
become near-impossible in the present environment of threats and discord. The present situation
cannot continue.” (Id at ¶ 1.) “To exit the impossible position,” they have also submitted their
resignations, effective upon the earlier of this Court’s approval of the proposed CRO or April 9,
2013. (Id. at ¶ 2.) In order to provide for an orderly transition, they have “agreed to
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accommodate the Committee’s approach and resolve the Committee’s baseless contempt motion
concerning the payment of counsel fees and certain other matters.” (Id. at ¶ 10.)
The Directors clearly imply that they acceded to the selection of the Committee’s
candidates as Replacement Directors and CRO. They did not independently verify the
credentials of Ingbir and Kelsi other than to review their curricula vitae, although they have no
reason to doubt their suitability for their proposed roles. (Id. at ¶ 19.) Nevertheless, they did not
conduct an independent search for, and vetting of, candidates for the Board. (Id.) “Rather, the
Board’s action was taken at the urging and upon the recommendation of the Committee and upon
the advice of the Debtor’s counsel at Bryan Cave.” (Id.)
DISCUSSION
As a rule, a bankruptcy court will not interfere in the corporate governance of a debtor
absent a “clear abuse.” See Manville Corp. v. Equity Security Holders Committee (In re Johns-
Manville Corp.), 801 F.2d 60, 64 (2d Cir. 1986); In re Potter Instrument Co., 593 F.2d 470, 475
(2d Cir. 1979). While most of the cases, including Manville, involved efforts to prevent
shareholders from exercising their rights, the broader principle applies to the selection of the
directors to manage the corporation. See In re 1031 Tax Group, LLC, No. 07-11448 (MG), 2007
WL 2085384, at *3 n. 4 (Bankr. S.D.N.Y. 2007) (“Sections 105(a) and 1107(a) may empower a
bankruptcy court to prevent a debtor from removing a manager, officer or director, but they do
not provide the Court with an independent power of appointment [and the Bankruptcy Code]
leaves state corporate governance law largely untouched, the primary exception being the power
to order the appointment of a chapter 11 trustee pursuant to § 1104.”) This does not mean that a
bankruptcy court should automatically abstain from approving consensual resolutions to
governance disputes that avoid the time and expense of litigation or the need to appoint a chapter
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11 trustee. Bankruptcy courts should not, however, take sides in corporate governance disputes
or approve the selection of one slate of directors over a competing slate.
Where corporate governance disputes spill over into areas that affect the debtor’s ability
to manage its affairs or conduct its business, the Bankruptcy Code provides a clear remedy.
Bankruptcy Code section 1104 authorizes a bankruptcy court to appoint a chapter 11 trustee for
cause, 11 U. S. C. §1104(a)(1), or “if such appointment is in the interests of the creditors, any
equity security holders, and other interests of the estate.” 11 U.S.C. §1104(a)(2). In determining
whether a trustee should be appointed under section 1104(a)(2), “in the interests of creditors,”
courts “look to the practical realities and necessities.” In re Ionosphere Clubs, Inc., 113 B.R.
164, 168 (Bankr. S.D.N.Y. 1990) (internal quotation omitted). Although decisions have
articulated certain factors to guide the court, see id. (“Among the factors considered are (i) the
trustworthiness of the debtor; (ii) the debtor in possession’s past and present performance and
prospects for the debtor’s rehabilitation; (iii) the confidence–or lack thereof–of the business
community and of creditors in present management; and (iv) the benefits derived by the
appointment of a trustee, balanced against the cost of the appointment.” (citations omitted)), the
standard is a flexible one. In re Sharon Steel Corp., 871 F.2d 1217, 1226 (3d Cir. 1989);
Ionosphere Clubs, Inc., 113 B.R. at 168; In re V. Savino Oil & Heating Co., Inc., 99 B.R. 518,
527 n.11 (Bankr. E.D.N.Y. 1989) (“[T]he factors constituting a basis for appointing a trustee
under § 1104(a)(2) are amorphous, diverse, and necessarily involve a great deal of judicial
discretion.”). Unlike § 1104(a)(1), § 1104(a)(2) does not require a finding of fault; the court may
appoint a trustee even if no “cause” exists. In re Marvel Entm’t Group, Inc., 140 F.3d 463, 474
(3d Cir. 1998); Sharon Steel Corp., 871 F.2d at 1226; Ionosphere Clubs, Inc., 113 B.R. at 168.
The Court has broad discretion, Sharon Steel, Corp., 871 F.2d at 1226, and at bottom, “it seems
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that § 1104(a)(2) reflects ‘the practical reality that a trustee is needed.’” V. Savino Oil &
Heating Co., Inc., 99 B.R. at 527 n.11 (quoting Sharon Steel Corp., 86 B.R. 455, 458 (Bankr.
W.D. Pa.1988)).
With this background, I turn to the Revised Stipulation. I assume, without deciding, that
the Board satisfied the requirements under Ampal’s by-laws and New York law when it resolved
to increase the number of directors, selected Kelsi and Ingbir as Replacement Directors, and
reduced the number of directors to three.6 I nevertheless decline to approve the Revised
Stipulation for two primary reasons. First, it purports to resolve a corporate governance dispute
among Maiman, the Directors and the Committee, without Maiman’s consent. In substance, the
Committee is asking me to side with them, and approve a governance change that they have
orchestrated arguably in derogation of Maiman’s rights as a controlling shareholder of Ampal.
The fact that time and expense may prevent Maiman from vindicating his rights is hardly a
reason for ignoring them. The Revised Stipulation, if approved, will not resolve anything and
will lead to more litigation.
Second, the Board’s process in selecting Kelsi and Ingbir as Replacement Directors gives
me pause. My comment is not intended to impugn their integrity or suitability as directors.
Rather, the Directors’ opposition implies that but for the pressures brought by the Committee,
they would not have selected replacement directors at all or would have followed a different
selection process and done more. In addition, the Directors will obtain personal benefits under
the Revised Stipulation through the plan exculpation proffered by the Committee. While I have
6 	The corporate governance actions identified in the Revised Stipulation require either resolutions or by-law
amendments. The Committee advised me at the hearing that the Board had effected the changes through resolutions,
but neither the resolutions nor the meeting minutes reflecting those resolutions have been supplied to the Court.
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no reason to doubt their devotion to their fiduciary duties, the fact remains that the Directors
have personal interests in seeing that the Revised Stipulation is approved.
Kelsi’s selection as CRO is less of a problem. A debtor will frequently retain a CRO,
subject to court order, at the insistence and with the approval of creditors, usually a secured
creditor. Kelsi appears to be well qualified, and although he was selected by the creditors, he
doubtless understands that a CRO owes fiduciary duties to the estate. Furthermore, the debtor
does not operate; its subsidiaries and affiliates operate in Israel and elsewhere, and it is important
to have someone on the ground that can run the businesses. However, it is not clear whether his
selection as CRO is contingent on my approval of the Revised Stipulation and intertwined with
and inseparable from the other corporate governance issues and promised exculpation, or can
stand alone. In other words, it is not clear that the Board (i.e., the Directors) selected him as
CRO unconditionally, or only on the condition that I approve the Revised Stipulation.
Having concluded that I will not approve the Revised Stipulation, the only alternative is
to appoint an operating trustee. Maiman and the United States Trustee urge me to do it now, the
Individual Parties have no objection if I do it now, and the Revised Stipulation provides that if I
do not approve it by April 9, 2013, the Committee will not object to the appointment of the
chapter 11 trustee. I recognize that this will add a layer of administrative expense that will have
to be paid on the effective date of the plan, but it is inevitable because Ampal will be without any
officers or directors (except for Maiman who, as stated above, is conflicted) come April 9.
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Accordingly, the United States Trustee is directed to appoint an operating trustee
pursuant to Bankruptcy Code §1104(a)(2).
So ordered.
Dated: New York, New York
April 5, 2013
/s/ Stuart M. Bernstein
STUART M. BERNSTEIN
United States Bankruptcy Judge
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