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In re Bayou Group

May 1, 2009



Appeal by the United States Trustee from a judgment entered in the United States District Court for the Southern District of New York (Colleen McMahon, Judge), affirming a decision of the United States Bankruptcy Court for the Southern District of New York (Adlai S. Hardin, Bankruptcy Judge) rejecting the United States Trustee's petition to appoint a trustee to manage the debtor. We hold that the district court did not err in denying the United States Trustee's appeal from the bankruptcy court's decision, where the district court had already appointed new management of the debtor and the United States Trustee showed no cause for removal of this management.


The opinion of the court was delivered by: John M. Walker, Jr., Circuit Judge

Argued: September 17, 2008

Before WALKER, KATZMANN, GIBSON*fn2, Circuit Judges.

Appellant Diana G. Adams, United States Trustee (the "U.S. Trustee"), appeals from a judgment of the District Court for the Southern District of New York (Colleen McMahon, Judge) that affirmed a decision of the Bankruptcy Court (Adlai S. Hardin, Bankruptcy Judge) rejecting the U.S. Trustee's application under 11 U.S.C. § 1104 to appoint a trustee to manage the Bayou entities ("Bayou," or "the Bayou entities") after the Bayou entities filed for Chapter 11 protection. Prior to the bankruptcy, the district court had appointed Jeff J. Marwil ("Marwil") as receiver to manage Bayou. On appeal, the U.S. Trustee argues, as she did below, that Marwil's duties as receiver ended upon Bayou's filing for bankruptcy protection, and therefore the bankruptcy court should have appointed her as the trustee.

We agree with the district court that the bankruptcy court's pre-petition order effectively appointed Marwil as both receiver and manager of Bayou, and thus conclude that there was no management vacancy for the U.S. Trustee to fill. Because the U.S. Trustee has provided no reason, based on Marwil's performance or qualifications, to replace him, we affirm the judgment of the district court that affirmed the bankruptcy court's denial of the U.S. Trustee's petition.


The Bayou entities are a group of hedge funds and related entities that were operated as fraudulent schemes, and are now debtors-in-possession in Chapter 11 proceedings under the Bankruptcy Code. Following Bayou's collapse in August 2005, Bayou's managers pled guilty to various federal criminal fraud charges, and were ordered to forfeit Bayou's assets.

On March 27, 2006, the Unofficial On-Shore Creditors' Committee (the "Committee"), Bayou creditors holding more than $130 million in claims, sought to "mitigate the massive losses suffered by the creditors and others" through the appointment of a "federal equity receiver" to pursue the litigation claims. See Adams v. Marwil (In re Bayou Group, L.L.C.), 363 B.R. 674, 678 (S.D.N.Y. 2007) (internal quotation marks omitted). The Committee asked the district court to appoint Marwil as both "non-bankruptcy federal equity receiver and exclusive managing member" for the Bayou entities. Id. at 680 (internal quotation marks and emphasis omitted). Following a two-day hearing that fully discussed "the subject of [Bayou's] corporate governance," id. at 679-80, the district court, without objection,*fn3 entered an order (the "Order") "authoriz[ing], empower[ing], and direct[ing]" Marwil to perform a number of "duties and responsibilities," including the responsibility for "Corporate Governance." Order ¶ 7(e). Marwil was directed to be "the sole and exclusive managing member and representative of each of the Bayou Entities[,] [possessing]... without limitation, the authority to petition for protection under the Bankruptcy Code, 11 U.S.C. §§ 101 et seq." Id. The Order specified that the appointment was "warranted under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 thereunder, state law claims of fraud and breach of a fiduciary duty, Federal Rule of Civil Procedure 66, and the facts and circumstances of this case." Id. at Introduction, ¶ 3. The Order further stated that the district court's authority to appoint Marwil was "[p]ursuant to 28 U.S.C. §§ 754 and 959, Federal Rule of Civil Procedure 66 and [the] [c]ourt's inherent authority." Id. ¶ 1.

Following the April 28 order, Marwil undertook his responsibilities as managing member of Bayou. On May 30, Marwil caused each Bayou entity to file a separate voluntary petition for relief under Chapter 11 of the Bankruptcy Code. 363 B.R. at 680. Thereafter Marwil brought more than 125 adversary proceedings seeking disgorgement from redeeming investors that have resulted in excess of $20 million in recovered assets. Marwil's efforts have been endorsed by all of Bayou's creditors, including the Official Committee of Unsecured Creditors (the "Official Creditors' Committee"), which was organized by the U.S.

Trustee shortly after Marwil's appointment.

On June 20, approximately eight weeks after Marwil's appointment, the U.S. Trustee moved in the bankruptcy court for an order appointing a Chapter 11 trustee to replace Marwil and oversee Bayou's bankruptcy proceedings. The bankruptcy court orally denied the U.S. Trustee's motion, both as an impermissible collateral attack on the Order, and because the district court had appointed Marwil not only as receiver of the Bayou entities, but also as "new management of the[] debtors" with the authority and capacity to manage the bankruptcy proceedings as the debtor-in-possession. 363 B.R. at 682 (internal quotation marks omitted). The bankruptcy court said:

Mr. Marwil is not simply a custodian.... [I]t is crystal clear that the purpose of Judge McMahon's order was to appoint somebody who was in fact and law the equivalent of a new board of directors, new CEO, new president, new CFO as a debtor-in-possession.... [I]t is ...

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