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In re DNIB Unwind, Inc.

United States District Court, D. Delaware

February 27, 2019

IN RE DNIB UNWIND, INC. (f/k/a BIND THERAPEUTICS, INC., Post-Effective Date Debtor.
GEOFFREY L. BERMAN, in his capacity as Trustee of the Liquidating Trust of DNIB Unwind Inc. f/k/a Bind Therapeutics, Inc., Defendant/Appellee. B.E. CAPITAL MANAGEMENT FUND, LP, Appellant,

          Julia B. Klein, KLEIN LLC, Wilmington, Delaware Counsel for Appellant

          John H. Knight, Amanda R. Steele, Brett M. Haywood, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Peter M. Gilhuly, Kimberly A. Posin, Amy C. Quartarolo, LATHAM & WATKINS LLP, Los Angeles, California Counsel for Appellee




         Presently before the Court is the appeal (D.I. 1) of Appellant B.E. Capital Management Fund LP ("BEC") from a Bankruptcy Court's decision (B.D.I. 694)[1]("Decision") denying BEC's Motion for Determination that the Trustee's Conditioning of Distributions to Shareholders on their Submission of Equity Distribution Form Violates the Plan, or, Alternatively, is an Impermissible Plan Modification (B.D.I. 615) ("Motion for Determination"), which sought a determination that Appellee's conditioning of distributions to shareholders upon receipt of certain tax documents and equity certifications is impermissible under the debtors' confirmed plan. Related to the appeal is BEC's pending motion for reconsideration (D.I. 18) ("Motion for Reconsideration") of the Court's Order (D.I. 13) denying BEC's motion for a preliminary injunction, temporary restraining order, and stay of the Decision pending appeal (D.I. 4) ("Emergency Motion"). For the reasons that follow, the Court will affirm the Decision and deny the Motion for Reconsideration as moot.


         On September 26, 2016, the Bankruptcy Court entered an order (B.D.I. 457) ("Confirmation Order") confirming debtors' plan of liquidation (B.D.I. 415) ("Plan"), which, inter alia, established the Liquidating Trust of DNIB Unwind, Inc. ("Trust") and appointed Appellee Geoffrey L. Berman as trustee ("Trustee"). On October 11, 2016, the Plan's effective date occurred. On December 15, 2016, Trustee made an initial distribution of $8 million to shareholders, as required under the Plan. (See B.D.I 694 at 3). Shareholders that held their shares in street name received their distributions through the Depository Trust Company ("DTC"). Thereafter, the Trust's tax professionals advised Trustee that further distributions to the debtors' former shareholders should be conditioned upon submission of certain tax documents, consisting of a Form W-8 or W-9 (the "Tax Forms") and an equity certification form (the "Equity Certification")[2] to be completed by the nominees of DNIB shareholders (the "Nominees") who held their shares in street name (i.e., through a broker or nominee) (collectively, the "Tax Documents"). (B.D.I. 627-1 at ¶ 6). On February 7, 2017, Trustee sent a notice requesting submission of same on or before August 7, 2017 (the "Submission Deadline"). (See B.D.I. 590). DTC subsequently informed the Trustee that it would not agree to make any further shareholder distributions if such distributions were made to less than all shareholders (which would result where at least one shareholder failed to provide its Tax Documents timely and was deemed to forfeit future distributions from the Trust). (See APP-0170).

         On March 22, 2017, BEC filed the Motion for Determination, [3] arguing that Trustee is mistaken (or at least overly cautious) in his position that the Tax Documents are necessary; that there may be alternative approaches (such as seeking a private letter ruling from the IRS); and that requiring submission of this information unfairly burdens shareholders, placing an unreasonable and unnecessary condition upon their right to receive their distributions. (B.D.I. 615). BEC further argues that permitting Trustee to condition distributions on the receipt of the Tax Documents will result in a substantial number of shareholders forfeiting future Plan distributions to which they legally are entitled. (See D.I. 4 at 11). A hearing on the Motion for Determination was held on May 31, 2017. (D.I. 4-4).

         On July 13, 2017, the Bankruptcy Court issued its Decision denying the Motion for Determination. (B.D.I. 694). The Bankruptcy Court determined that the Plan and Confirmation Order, along with the post-confirmation trust instrument (SA-079-101) ("Trust Agreement"), govern the rights and responsibilities of Trustee and the Trust beneficiaries, and that those governing documents permit Trustee to demand from Trust beneficiaries any forms or information relating to Trustee's obligations to withhold and to condition distributions upon receipt of such forms or information. (B.D.I. 694 at 2). The Bankruptcy Court noted that "Trustee's documentation requests here impose at most a modest burden on the shareholders/beneficiaries," and the Court declined, on a post-confirmation basis, to second-guess the judgment of Trustee in the exercise of his duties where those actions are directly contemplated by the governing documents. (See id, at 3).[4]

         On July 14, 2017, BEC filed a timely Notice of Appeal with respect to the Decision. (D.I. 1). The same day, BEC initiated an adversary proceeding against Trustee by filing a complaint in the Bankruptcy Court seeking declaratory and injunctive relief (Adv. D.I. 1, 14) ("Complaint"), together with an Emergency Motion for Preliminary Injunction and Temporary Restraining Order (Adv. D.I. 4) ("TRO Motion"). The TRO Motion sought an order enjoining Trustee, through a final adjudication of the Motion for Determination, from:

(i) conditioning further distributions to DNIB shareholders on the receipt of the required Tax Documents; and
(ii) making any further distributions to DNIB shareholders until further order of the court.

         (See Adv. D.I. 4 at 12; D.I. 4 at 1-2). The TRO Motion further sought a stay pending appeal as alternative relief to the injunctive relief it sought. (See Adv. D.I. 4 at 11-12). On July 20, 2017, the Bankruptcy Court promptly set a hearing on the TRO Motion for August 3, 2017. (See Adv. D.I. 9). Notwithstanding BEC's knowledge that an emergency hearing date had been set by the Bankruptcy Court, BEC filed the Emergency Motion in this Court on July 25, 2017. (D.I. 4). The Emergency Motion sought precisely the same relief sought in the TRO Motion: a preliminary injunction, temporary restraining order, and stay pending appeal of the Decision. (D.I. 4).[5]

         On August 3, 2017, the Bankruptcy Court held a hearing on the TRO Motion, and, on August 7, 2017, BEC advised the Court that its request for a stay had been denied. (D.I. 11). On August 8, 2017, the Court denied the Emergency Motion. (D.I. 12, 13). On August 14, 2017, BEC filed the Motion for Reconsideration of same, which is fully briefed. (D.I. 18, 20, 22). The merits of the appeal are also fully briefed. (D.I. 21, 25, 33). The Court did not hear oral argument because the facts and legal arguments are adequately presented in the briefs and record, and the Court's decisional process would not be aided by oral argument.


         This Court has jurisdiction over this appeal from the Bankruptcy Court under 28 U.S.C. § 158. The Decision denying the Motion for Determination is based on the Bankruptcy Court's interpretation of the Confirmation Order, which incorporated the Plan and Trust Agreement. The interpretation of an order is a conclusion of law. In re Duplan Corp., 212 F.3d 144, 151 (2d Cir. 2000) (bankruptcy court interpretation of confirmation order is conclusion of law). Legal conclusions of the bankruptcy court are subject to plenary review by the district court and are considered de novo on appeal. In re Klaas, 858 F.3d 820, 827 (3d Cir. 2017); In re Cont'I Airlines, 150 B.R. 334, 336 (D. Del. 1993).

         IV. ANALYSIS

         On appeal, BEC asserts that the Bankruptcy Court erred as a matter of law in holding that "the Plan, the Confirmation Order and the Trust Agreement all operate to provide Trustee with the authority to demand the tax forms and the Certifications." (D.I. 21 at 1). BEC asserts that this legal conclusion is not supported by the provisions in the operative plan documents upon which the Bankruptcy Court relied. (Id. at 7-12). BEC further asserts that the Decision violates principles of contract construction and interpretation because permitting the Trustee authority to condition distributions on the submission of Tax Documents would render all provisions relating to the Debtors' transfer agent meaningless. (Id. at 12-14). Trustee has challenged BEC's standing, and therefore the Court will address that issue before turning to the merits of the appeal.

         A. BEC Has Standing to Prosecute the Appeal

         Trustee argues that BEC lacks standing to prosecute the appeal. (D.I. 25 at 5-6). "[A]n appellant must qualify as a 'person aggrieved' to be eligible for appellate review of a bankruptcy court order." Gen. Motors Acceptance Corp. v. Dykes (In re Dykes), 10 F.3d 184, 188 (3d Cir. 1993). Thus, "[t]o appeal from an order of a bankruptcy court one must show that the order diminishes one's property, increases one's burdens or impairs one's rights." Id. at 188-89. Trustee cites the three elements comprising what the Supreme Court has referred to as "the irreducible constitutional minimum of standing:"

First, the plaintiff must have suffered an "injury in fact" -an invasion of a legally protected interest which is (a) concrete and particularized ... and (b) "actual or imminent, not 'conjectural' or 'hypothetical[.]'" ... Second, there must be a causal connection between the injury and the conduct complained of- the injury has to be "fairly ... trace [able] to the challenged action of the defendant, and not... the result [of] the independent action of some third party not before the court." ... Third, it must be "likely," as opposed to merely "speculative," that the injury will be "redressed by a favorable decision."

(D.I. 25 at 6 (second alteration added; other alterations in D.I. 25) (quoting Lujan v. Defs. of Wildlife, 504 U.S. 555, 560-61 (1992))). Trustee argues that BEC has suffered no injury in fact. (Id. at 6). "BEC (through its Nominee) provided its Tax Documents to the Trust on June 16, 2017 (28 days before BEC filed its Notice of Appeal) and now is entitled to its pro rata share of all future distributions to be made to shareholders under the Plan. As such, BEC does not have a financial interest in the outcome of this appeal." (Id.). Conversely, BEC argues that it will be harmed, even if it receives a distribution by virtue of having turned in its Tax Documents. (D.I. 33 at 2-3). "This is so because, by circumventing the transfer agent and [] DTC, the Trustee will deprive [BEC] of the dividends to which [BEC] is entitled from other shareholders on account of shares that it purchased after the Distribution Record Date by virtue of applicable SEC rules." (Id. at 3). Trustee has conceded that BEC has a financial interest in the outcome of the appeal. (See D.I. 25 at 16 n.14). Thus, BEC has standing to prosecute the appeal.[6]

         B. BEC Failed to Present Evidence Contradicting the Trust's Tax Reporting Obligations or Present Viable Alternatives

         At the core of this appeal is a dispute as to whether the information contained on the Tax Documents is required for the Trust to meet its tax reporting obligations. BEC argues that the Trust's provision of shareholder tax identification numbers to the IRS is strictly "optional" (D.I. 21 at 10-11), and Trustee has consistently asserted that it is not. (D.I. 25 at 7-9). In its answering brief, Trustee sets out the tax reporting obligations specified by the Trust Agreement, [7] the specific statutes and related regulations with which the Trust must comply (including 26 C.F.R. § 1671-4(a)), the required forms, and the instructions governing completion and submission of same.[8] BEC has suggested that, as an alternative to the reporting requirements of 26 C.F.R. § 1671-4(a), Trustee may comply with 26 C.F.R. § 1.671-4(a) by solely reporting DTC's tax identification number (instead of the tax identification number of each shareholder). (See D.I. 21 at 12 n.l 1). Trustee argues this alternative is not viable because (1) the instructions to Form 1041 are clear that Trustee must provide a tax identification number for "the person(s) to whom the income is taxable" and (2) the income of the Trust is taxable to each grantor/shareholder and not to DTC.[9] (D.I. 25 at 8). BEC also suggests that Trustee may, in the alternative, comply with the requirements contained in 26 C.F.R. § 1.671-4(b)(3). (See D.I. 21 at 12 n.ll). Trustee argues that this alternative is not viable because 26 C.F.R. § 1.671-4(b)(3) requires that the Trust file Forms 1099. (D.I. 25 at 8-9). "Under the 1099 reporting method, the Treasury Regulations similarly require the Trust to report all items of income paid to the Trust by all payors and to identify 'each grantor or other person treated as an owner of the trust as the payee.'" (D.I. 25 at 9 (quoting 26 C.F.R. § 1.671-4(b)(3)(ii)(A))). Accordingly, "Trustee can comply with these requirements only if the shareholders that held their shares in street name identify themselves by providing the Tax Documents." (D.I. 25 at 9). BEC offers no response to these tax reporting requirements in its reply. (See D.I. 33).

         The Court finds no basis to question that the information contained in the Tax Documents is required in order for the Trust to fulfill its tax reporting obligations. BEC has provided no evidence to the contrary, and it points to no evidence in the record on appeal in support of its assertion that there ...

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