Leveling the Playing Field

HOW TO LEVEL THE PLAYING FIELD IN FAVOR OF CREDITOR INTERESTS: A CRITICISM OF IN RE ELETSON AND ITS FAILURE TO APPOINT A CHAPTER 11 TRUSTEE

By Marc Kirschner & Gordon Z. Novod

1. INTRODUCTION

A panel at the American Bankruptcy Institute’s New York City Bankruptcy Conference held June 17, 2025 explored whether chapter 11 still works in an era of non-stop liability management transactions or exercises (LMEs), pre-negotiated restructuring support agreements (RSAs), debtor-in-possession financing ‘rollups,’ and overnight pre-packaged plans of reorganizations.¹ The panel debated whether the judicial process should shore up corporate governance, do more to deter insider opportunism, invigorate Official Committees, increase policing by the Office of the U.S. Trustee, and generally protect creditors from aggressive actions taken by entrenched management, operating at the behest of equity, when managing a debtor-in-possession. But the panel did not discuss the fundamental tool used to protect creditors from conduct adverse to creditors, namely the appointment of a Chapter 11 Trustee.

As experienced bankruptcy professionals will tell you, Chapter 11 affords debtors-in-possession and their entrenched management the luxury of control over their restructuring, from the right to stay in possession of the debtors’ business and assets, the exclusive right to propose a plan of reorganization, and the breathing spell afforded by the automatic stay. At the same time, Chapter 11 provides for some remedies for creditors as they seek to level the playing field, such as the appointment of a Chapter 11 Trustee, the appointment of an examiner, the right to adequate protection, and the right to accept or reject a proposed plan, with restrictions on cramdown. However, the Chapter 11 playing field is tilted in favor of debtors and entrenched management at the expense of creditor interests and expeditious case administration.

This article explores a recent opinion denying a request to appoint a Chapter 11 Trustee under Bankruptcy Code Section 1104(a)(2), and whether such an opinion will lead to further the degradation of creditor protections under the Bankruptcy Code.

On May 29, 2024, Bankruptcy Judge John P. Mastando, III, U.S. Bankruptcy Judge for the Southern District of New York issued an opinion in In re Eletson Holdings, Inc., et al., 659 B.R. 426 (Bankr. S.D.N.Y. 2024) denying a request to appoint a Chapter 11 Trustee under Bankruptcy Code Section 1104(a)(1) and 1104(a)(2). Relying on In Re WorldCom, Inc.,²Judge Mastando held that “[U]nder section 1104(a)(2), a creditor group, no matter how dominant, cannot justify the appointment of a trustee simply by alleging that it would be in its best interests.”³

From the standpoint of creditor protection, the Bankruptcy Court’s ruling in Eletson missed an opportunity to level the playing field in favor of creditor interests, resulting in a ruling that is inconsistent with the principles that underly the modern Bankruptcy Code, namely fairness and timeliness. “The delay is the punishment” is an appropriate description of the consequences of the Bankruptcy Court’s ruling, as the Bankruptcy Court merely postponed the inevitable clash to the very end of the case, and additional rancor and disputes continue to this day notwithstanding the Court’s confirmation of a creditor proffered plan of reorganization.

2. SECTION 1104 – APPOINTMENT OF A TRUSTEE OR EXAMINER

Bankruptcy Code Section 1104(a) provides:

(a) At any time after the commencement of the case but before confirmation of a plan, on request of a party in interest or the United States trustee, and after notice and a hearing, the court shall order the appointment of a trustee—

(1) for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause, but not including the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor; or

(2) if such appointment is in the interests of creditors, any equity security holders, and other interests of the estate, without regard to the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor.

11 U.S.C. §1104(a) (emphasis added).

The debtor under Bankruptcy Code Section 1107 is a fiduciary responsible for operating its business, investigating and seeking the return of potential causes of action and proposing and confirming a plan of reorganization or liquidation.⁴ Creditors and other parties in interest, including the Office of the U.S. Trustee, serve as counter-weight to ensure the debtor is properly exercising its fiduciary duties and providing fair and equitable treatment under the Bankruptcy Code.

However, where a debtor’s creditors suspect fraud, dishonesty, incompetence, gross mismanagement or similar cause, (1) Section 1104(a)(1) permits them to seek the appointment of a Chapter 11 Trustee to replace management, investigate certain causes of action, seek to propose a plan, or (2) Section 1104(a)(2) permits the appointment of a Chapter 11 Trustee if such appointment is in the interests of creditors, any equity securities holders, and any other interests. While Section 1104(a)(1) requires a court to analyze a number of factors, the appointment of a Chapter 11 Trustee is considered an extraordinary remedy and parties seeking such appointment must prove by “clear and convincing evidence that the appointment is warranted.” In re Bayou Grp., LLC, 564 F.3d 541,546 (2d Cir. 2009); Eletson, 659 B.R. at 430.

The appointment of a Chapter 11 Trustee under Section 1104(a)(2), on the other hand, rests in the bankruptcy court’s discretion, which is broad. See In re China Fishery Grp. Ltd. (Cayman), No. 16-11895 (JLG), 2016 WL 6875903 (Bankr. S.D.N.Y. Oct. 28, 2016) and In re Marvel Entm’t Group, Inc., 140 F.3d 463 (3d Cir. 1998);⁵ c.f. In re Eletson, 659 B.R. at 456 (applying a “clear and convincing” standard with respect to whether the debtor’s conduct was trustworthy prong of the Section 1104(a)(2) analysis, but not to (1) the debtor’s past and present performance and prospects for rehabilitation, (2) the confidence of the business community in the debtor, and (3) whether the benefits of a trustee outweigh the costs).

In In re WorldCom, Inc., Bankruptcy Judge Allan L. Gropper was asked to consider, and ultimately denied, the appointment of a Chapter 11 Trustee. In re WorldCom, Inc., No. 02–13533 (AJG), 2003 WL 23966765 (Bankr. S.D.N.Y. May 16, 2003). WorldCom was a publicly traded company and one of the largest long-distance telecom providers in the U.S. until its collapse in 2002. WorldCom involved one of the largest accounting frauds in history, led to a $ 6 billion settlement against major financial institutions for the benefit of bondholders and former shareholders, contributed to the demise of the Arthur Andersen accounting firm and was part of a spate of corporate crimes that led to the Sarbanes-Oxley Act in July 2002 which strengthened disclosure requirements and penalties for fraudulent accounting.

Judge Gropper wrote that “[u]nder section 1104(a)(2), a creditor group, no matter how dominant, cannot justify the appointment of a trustee simply by alleging that it would be in its interests.” WorldCom, 2003 WL 23966765, 2003 Bankr. LEXIS 2192, at *19 (Bankr. S.D.N.Y. May 16, 2003) (citations omitted). Judge Gropper went on to say:

It is important to remember that the “interests” standard requires a finding that appointment of a trustee would be in the interest of essentially all interested constituencies. … Use of the word “and” [in the text of section 1104(a)(2)] suggests that creditors cannot on their own obtain the appointment of a trustee under the provision in order to disenfranchise equity security holders or other interests. Instead, appointment of a trustee must be in the interest of the estate generally in order to satisfy the statutory “interest” standard.

Id. (quoting 7 Alan N. Resnick & Frank J. Sommer, Collier on Bankruptcy, ¶ 1104.02[3][d][i] (15th ed. rev. 2003)).

Judge Gropper in WorldCom also explained that:

The traditional factors used to determine the propriety of a trustee under subsection (a)(2) include:

(i) the trustworthiness of the debtor;

(ii) the debtor’s past and present performance and prospects for rehabilitation;

(iii) the confidence of the business community in the debtor; and

(iv) whether the benefits of a trustee outweigh the costs.

Id. (citing In re Ionosphere, 113 B.R.164, 168 (Bankr. S.D.N.Y. 1990)).

While the “clear and convincing” articulated in In re Bayou Grp. (564 F.3d at 546) and applied in Eletson (659 B.R. at 430) is applicable in the Second Circuit, this standard may not be well suited for a motion seeking the appointment of a Chapter 11 Trustee if courts are reluctant to exercise discretion to appoint a Chapter 11 Trustee.

3. FACTUAL AND LEGAL RULINGS IN ELETSON

1. Background

Eletson Holdings Inc. (“Eletson”) was the parent of a Greek-based international gas shipping enterprise operating a fleet of 18 medium and long-range oil and gas tanker vessels that carry a wide range of refined petroleum products, as well as crude oil. The business was operated through debtor and non-debtor entities that were closely held by several interrelated Greek family groups, each holding equity through offshore trusts. These families also occupied management positions in Eletson and its subsidiaries.

In 2013, Eletson issued $300 million in secured notes, later exchanged in 2018 for new First Preferred Ship Mortgage Notes of about $314 million due 2022. By 2022, Eletson defaulted on these notes, owing approximately $354 million (including accrued interest) to noteholders, leaving Eletson unable to service its debt by early 2023.

2. Eletson’s Bankruptcy Filing

On March 8, 2023, a group of noteholders commenced an involuntary bankruptcy proceeding against Eletson and affiliates under Chapter 7 (liquidation), signaling creditors’ extreme lack of confidence in Eletson’s management. After months of disputes, on September 6, 2023, the parties stipulated to convert the cases to voluntary cases under Chapter 11. An Official Committee of Unsecured Creditors for the Eletson debtors was appointed on October 20, 2023 to represent the interests of all unsecured creditors of the Eletson debtors.

Aside from its tanker fleet, a central asset in controversy was Eletson’s interest in Eletson Gas LLC, a joint venture formed in 2013 to own Liquefied Petroleum Gas (LPG) carriers. Eletson had issued Preferred Shares in Eletson Gas to outside investors. However, in a complex pre-bankruptcy transaction, Eletson’s insiders allegedly transferred the valuable Eletson Gas preferred equity to insider-controlled entities (the “Cypriot Nominees”) for little or no consideration. This maneuver became the subject of an international arbitration: on September 29, 2023, an arbitrator found that Eletson had exercised an option to acquire those Preferred Shares and placed the shares with the Cypriot Nominee entities (affiliates of Eletson’s principals).

Eletson moved to confirm this award in U.S. District Court for the Southern District of New York, but in February 2024 the District Court vacated parts of it. See Eletson Holdings, Inc. v. Levona Holdings Ltd., 716 F. Supp. 3d 242 (S.D.N.Y. 2024), amended and superseded by Eletson Holdings, Inc. v. Levona Holdings Ltd., 731 F. Supp. 3d 531 (S.D.N.Y. 2024). In a further order issued September 6, 2024, the District Court, expressed concern that Eletson withheld key documents during arbitration, and found evidence suggesting the award “was procured by fraud or undue means” allowing discovery into whether Eletson’s management had hidden material information. See Eletson Holdings, Inc. v. Levona Holdings Ltd., Case No. 23-cv-7331 (LJL) (S.D.N.Y. 2024), Dkt. 162. This backdrop of alleged insider self-dealing and dishonesty set the stage for calls to appoint a Chapter 11 trustee.

3. Motions to Appoint a Chapter 11 Trustee for the Eletson debtors

In late 2023, three separate motions to appoint a Chapter 11 Trustee for the Eletson debtors were filed: one by the U.S. Trustee; one by the Official Unsecured Creditors’ Committee; and one by the petitioning noteholders. Eletson, 659 B.R. at 430. The movants argued “cause” existed under 11 U.S.C. §1104(a)(1) – including fraud, dishonesty, gross mismanagement, or incompetence by current management – and alternatively that a trustee was in the best interests of creditors under Section 1104(a)(2). Id., at 659 B.R., at 442-43. A three-day evidentiary trial on the Chapter 11 Trustee motions was held in April 2024, with testimony from seven fact and expert witnesses. Id., at 659 B.R., at 431. Eletson’s petitioning creditors painted a picture of a company run for the insiders’ benefit at creditors’ expense (see, e.g., In re Eletson Holdings, Inc., et al., Case No. 23-10322 (JPM) (Bankr. S.D.N.Y.), Dkt. 394, at ¶ 3), while Eletson’s shareholders characterized the push for a Chapter 11 Trustee as a power grab by “vulture” hedge funds (see, e.g., In re Eletson, et al., Case No. 23-10322, Dkt. 518, at ¶ 1), ignoring the active participation of the U.S. Trustee (see, e.g., In re Eletson, Case No. 23-10322, Dkt. 424). Eletson’s majority shareholders also insisted that a Chapter 11 Trustee would not understand and be able to operate a global shipping company. See In re Eletson, Case No. 23-10322, Dkt. 518, at ¶ 1).

On May 29, 2024, Judge Mastando issued a 59-page opinion denying all motions to appoint a Chapter 11 Trustee. Eletson, 659 B.R. 426. In his Memorandum Opinion, Judge Mastando acknowledged the case’s highly acrimonious nature but ultimately concluded that replacing Eletson’s management with a Chapter 11 Trustee was not justified. Id., 659 B.R. at 459.

Judge Mastando emphasized that appointing a Chapter 11 trustee is an “extraordinary remedy” (Eletson, 659 B.R. at 442), and under Section 1104(a)(1), a trustee may only be appointed for “cause” or under Section 1104(a)(2) if it serves the interests of creditors. The burden of proof (on the moving creditors and U.S. Trustee) was clear and convincing evidence as to whether the debtor’s conduct was trustworthy, while remaining silent on the burden of proof with respect to the other prongs of the Section 1104(a)(2) analysis (id.).

Judge Mastando systematically sifted through the voluminous evidentiary record focusing on the purported transfer of the Eletson’s preferred shares and the manner in which the Eletson debtors conducted themselves during the bankruptcy cases, including appointing a conflicted special committee to investigate potential claims against insiders. See generally Eletson, 659 B.R. 426. In each instance, Judge Mastando Court found that the moving creditors failed to meet their burden of proof regarding these actions.

1. Pre-Bankruptcy Misconduct

A central argument for cause was Eletson’s pre-petition conduct – particularly the transfer of the Eletson Gas Preferred Shares to insider family nominees without timely disclosure. Creditors argued this was a fraudulent transfer and breach of fiduciary duty warranting a trustee. Eletson, 659 B.R. 443. Judge Mastando agreed the situation was concerning but found it distinguishable from more egregious cases of insider abuse. See Eletson, 659 B.R. at 447-48; In re V. Savino Oil & Heating Co., Inc., 99 B.R. 518, 527 (Bankr. E.D.N.Y. 1989) (where a debtor had secretly diverted its “most valuable assets” to a new entity to stymie creditors); In re Sillerman, 605 B.R. 631, 641-42 (Bankr. S.D.N.Y. 2019) (where a trustee was appointed when a debtor refused to pursue avoidance actions against his family and made unauthorized post-petition asset sales). By contrast, Judge Mastando found the Eletson arbitration did not definitively establish that Eletson’s management acted with fraudulent intent in the share transfer; the arbitrator ultimately found no “bad faith or misconduct” in Eletson’s failure to give formal notice of the transfer (even though it “raised concern”). Eletson, 659 B.R. at 448. Judge Mastando also noted it had “not been established that the Eletson debtors intentionally failed to disclose” the preferred share scheme to creditors. Id.

2. The Eletson Debtors’ Conduct During the Case

The creditor movants also attacked Eletson’s behavior in the Eletson Chapter 11 cases – accusing management of conflicts of interest, lack of transparency, disobeying court orders, and mismanaging the Eletson debtors’ reorganization. Eletson, 659 B.R. at 443-44, 450-53. The creditor movants also pointed out the extraordinary acrimony in the proceedings. In re Eletson Holdings, Inc., et al., Case No. 23-10322, Dkt. 394, at ¶¶ 81–82; 424, at 2, 8-11. Judge Mastando addressed each point and generally found that, while Eletson’s performance was far from perfect, it did not rise to the level of “gross mismanagement” or incompetence that would require a Chapter 11 Trustee. Eletson, 659 B.R. at 450-53.

3. Best Interests Test

Judge Mastando also weighed whether appointing a trustee would be in the best interest of creditors under Section 1104(a)(2), considering the overall case progress, cost, and creditor sentiments. Eletson, 659 B.R. at 453-54. Judge Mastando acknowledged the “overwhelming creditor support” for a trustee, and he recognized the case was “incredibly acrimonious.” Id., 659 B.R. at 458. Eletson had objected to nearly every creditors’ committee request, and letters were flying back and forth almost daily. Id., 659 B.R. at 440.

However, Judge Mastando found that acrimony and distrust alone did not justify the appointment of a Chapter 11 Trustee in this context, and that by late May 2024 the Eletson debtors’ Chapter 11 cases had made substantial progress despite the infighting: both the Eletson debtors and the Eletson’s creditor group had filed disclosure statements and competing plans of reorganization, and the Eletson debtors’ bankruptcy cases were on the “eve of…solicitation” for a plan vote. Eletson, 659 B.R. at 461. Judge Mastando expressly warned that dumping a Chapter 11 Trustee into the Eletson debtors’ bankruptcy case at that late stage “could significantly delay the progress that has been made” toward a reorganization plan. Id. More critically, Judge Mastando agreed with Eletson management that ousting management in the complex international shipping business could disrupt Eletson’s relationships with customers, employees, and foreign regulators, thereby harming creditor recoveries rather than helping. Id.

4. THE FATAL FLAW IN THE ELETSON COURT’S ANALYSIS UNDER 11 U.S.C. § 1104(a)(2)

While commentators and scholars could have legitimate debates about the Bankruptcy Court’s conclusion under the Section 1104(a)(1) factors, the Eletson decision on Section 1104(a)(2) is hard to reconcile with the interests of Eletson’s creditors.

In Eletson, there was a small number of inter-related, family-controlled insiders, all based off-shore, tremendous animosity among the lawyers and principals for the debtors on one hand, and for the debtors’ creditors on the other hand. There was extensive correspondence between the debtors and the creditors’ counsel to the Bankruptcy Court. The Office of the U.S. Trustee expressed its strong support for the appointment of a Chapter 11 Trustee. Unlike WorldCom, Eletson did not involve an U.S. Securities and Exchange Commission investigation and massive class action lawsuit, was not a massive accounting fraud, and only involved a few discrete shipping assets; no public interest.

These facts stand in contrast to those present in WorldCom, relied on by the Bankruptcy Court in Eletson. In WorldCom, there were thousands of public shareholders, a massive accounting fraud that led to the demise of the Arthur Andersen accounting firm, prison sentences for some former high-level managers, and a strong public interest that led to the passage of the Sarbanes-Oxley Act to address public company disclosure and accounting fraud.

The conclusion by the Bankruptcy Court in Eletson that a Chapter 11 Trustee could not manage the business underestimates the ability of skilled and experienced independent fiduciaries to manage complex businesses. Independent fiduciaries are typically value-enhancing. They offer unbiased management, the ability to leverage best practices from other engagements, and a greater ability to make changes needed for a turnaround. Additionally, the Eletson Creditors’ Committee offered expert testimony that a Chapter 11 Trustee would have had many options to effectively manage the Eletson Debtors’ business, including continuing to employ existing personnel or seeking external solutions to certain management functions. Eletson, 659 B.R. at 441-42. Any skilled and experienced independent fiduciary would have quickly searched for and retained independent, skilled ship management personnel, well-versed in the Greek shipping industry. Thus, it stretches the bounds on reason to conclude that a skilled, experienced, and professional bankruptcy professional appointed as a Chapter 11 Trustee could not manage the Eletson debtors’ business.

5. THE ELETSON COURT’S REFUSAL TO APPOINT A CHAPTER 11 TRUSTEE DID NOT ‘COOL THE TEMPERATURE’ OF ELETSON’S CHAPTER 11 CASES

With Eletson’s management remaining in control, the Eletson debtors’ reorganization process unfolded in a hotly contested and acrimonious manner.

The Eletson debtors sought to implement a “new value” plan where the family shareholders would invest new capital to retain an ownership stake. In re Eletson Holdings Inc., Case No. 23-10322 (JPM) (Bankr. S.D.N.Y.), Dkt. 370, 570. Eletson’s creditors argued this plan unfairly subordinated creditor claims to equity’s interests, violating the absolute priority rule by giving the old owners value while unsecured creditors were not being paid in full. Id., Dkt. Nos. 651, 669. By contrast, the Eletson creditors’ plan (filed by the petitioning noteholders and supported by the Committee) ousted the family ownership and gave the bulk of equity in the reorganized company to the creditors. Id., Dkt. 531.

Months were spent on disclosure statement approvals, plan voting, and then a trial to confirm one plan over the other. The Bankruptcy Court ultimately confirmed the creditors’ plan, but because no Chapter 11 Trustee was appointed, Eletson’s management was able to pursue their ultimately flawed reorganization strategy for several additional months, forcing creditors to litigate plan issues that might have been resolved more efficiently otherwise. Viable opportunities were being missed or delayed while Eletson’s insiders clung to control, costs escalated and ultimate recoveries delayed.⁶

Ultimately, on October 25, 2024, the Court issued a decision confirming the Petitioning Creditors’ chapter 11 plan (the “Plan”) and overruling the Debtors’ and Former Majority Shareholders’ objections thereto, among other things. See In re Eletson Holdings Inc., Case No. 23-10322, Dkt. 1212 (the confirmation order), 1132, Ex. 1 (the Plan). On November 4, 2024, the Bankruptcy Court entered the order confirming the Plan. See id. Dkt. 1223 (the “Confirmation Order”). Through the Confirmation Order, the Bankruptcy Court ordered the Eletson debtors and all of their “Related Parties” to work in good faith to facilitate the Plan’s consummation in full, to refrain from actions inconsistent with full consummation of the Plan, and to take directions from the Eletson petitioning creditors in connection with Plan implementation. On November 19, 2024, the Plan went effective. Id., Dkt. 1258.

During the period following the Bankruptcy Court’s confirmation of the Plan, but before the Plan went effective, the Eletson debtors’ former principals took action that the Eletson creditors argued violated the Plan. For instance, on November 11, 2024, Elafonissos Shipping Corporation and Keros Shipping Company filed a petition with the First Instance Court of Piraeus in Greece seeking the appointment of a provisional board of directors of Eletson Holdings, despite the fact that, pursuant to the Confirmation Order and the Plan, the board of Holdings would be replaced on the Effective Date approximately one week later. The creditors alleged that the Greek petition collaterally attacked this Court’s orders, including the claims-objection decision, the confirmation decision, and the Confirmation Order, seeking to relitigate these rulings in Greece.

On November 12, 2024, the Greek Court issued an ex parte interim order replacing certain resigning directors of Eletson Holdings and appointing “Provisional Appointees” in their stead to join the remaining directors to form a provisional board of Eletson Holdings.

On November 25, 2024, reorganized Eletson Holdings filed an emergency motion seeking an order imposing sanctions on Eletson Holdings’ former shareholders, officers, directors, and counsel. See In re Eletson Holdings Inc., Case No. 23-10322, Dkt. 1268. The Bankruptcy Court held a trial on the sanctions motion on January 6, 2025. See id., Dkt. 1382. On January 24, 2025, the Bankruptcy Court issued an oral decision granting the sanctions motion, as modified, which was followed on January 29, 2025 by an accompanying order. Id., Dkt. 11396, 1402. The Bankruptcy Court’s order reiterated the contents of the Plan concerning vesting of assets and control over the reorganized Eletson.

Notwithstanding that order, Eletson’s former management continued to fail to comply with their obligations under the Plan. The Bankruptcy Court had to issue orders enforcing the Plan and directing Eletson’s former shareholders and management to cooperate. In March 2025, the Bankruptcy Court found the legacy Eletson board of directors in contempt and ordered a $5,000 per day fine until they obeyed the Plan’s requirements. Id., Dkt. 1536, 1537.

On July 2, 2025, the reorganized Eletson debtors obtained a court order granting a motion for attorneys’ fees and costs after asserting that Eletson’s former majority and minority shareholders, among others, treated the Bankruptcy Court’s authority and the confirmed Plan with contempt and “inflicted direct and measurable harm” by among other things forcing the reorganized company to seek enforcement of the confirmation order in Liberia and Greece. Id., Dkt. 1712. The Bankruptcy Court increased the sanctions with respect tto certain persons to $10,000 per day. Id., Dkt. 1716.

In late May 2025 the purported preferred Cyprus-based former shareholders argued the Bankruptcy Court erred in extending the Plan’s injunction to prevent Eletson Gas, a non-Debtor, from pursuing recognition of an arbitration award in a Greek court. The reorganized debtor argued this Motion was procedurally improper, and sought to relitigate issues already resolved by the Bankruptcy Court, including that the companies are bound by the Plan as affiliates of Eletson’s former owners. On June 6, 2025, the court in Piraeus, Greece held it had no jurisdiction to upset the Bankruptcy Court’s rulings because Eletson management was then in the United States of America. See Court of First Instance of Piraeus, Maritime Dept., 2572/2025, June 6, 2025.

On July 30, 2025, the reorganized Eletson Debtors brought an adversary proceeding seeking $63.5 million in damages accusing the former management and shareholders of misdirecting funds and undermining the reorganization by setting up their own “provisional board” which fought against having the confirmed plan recognized in Greece and Liberia, and launched legal actions against ship registries and banking partners. See Eletson Holdings Inc., et al. v. Kertsikoff et al., Adv. Case No. 25-01120-JPM (Bankr. S.D.N.Y.), Dkt. 1. The adversary complaint also alleged that defendants continued to refuse to hand over important documents and records in violation of the plan. Id.

The reorganized Eletson debtors also took issue with the conduct, prior to and after the entry of the Confirmation Order of the Eletson debtors’ counsel, seeking to bar representing Eletson Holdings’ former management, and to compel the former counsel to turn over documents to the reorganized Eletson.

6. CONCLUSION

Judge Mastando’s refusal to appoint a Chapter 11 Trustee is one example of a Chapter 11 case not delivering on its foundational principles. The Bankruptcy Court deferred an inevitable clash between the Eletson debtors’ former management and equity holders, and Eletson’s creditors in the hope that the Chapter 11 plan confirmation process would pave the way to a smooth restructuring. But quite the opposite has happened, with the rancor and animosity among the combatants continuing for over a year after the Bankruptcy Court denied the motion to appoint a Chapter 11 Trustee and nine-plus months after the Bankruptcy Court confirmed the creditors’ Plan.

If a Chapter 11 Trustee had been appointed when requested, the instability caused by turnover in Eletson’s management could have been avoided, rather than being merely delayed until the Plan became effective. Without a Chapter 11 Trustee, Eletson’s creditors had to fight every step to achieve full payment priority, including taking numerous steps post-confirmation, ousting prior debtors’ counsel and several times seeking contempt sanctions, whereas a Chapter 11 Trustee might have simply pursued that result administratively without huge delays and substantial additional costs.

Relying on the inapposite WorldCom case rather than a more flexible standard such as in China Fisheries and Marvel Entertainment led to constant clashes, extraordinary continuous acrimony, delay and substantial additional costs. Attributing any value to the argument that a Chapter 11 Trustee could not manage the shipping business was demonstratively wrong. Nine-plus months post confirmation and after millions of dollars of additional fees, the creditors were still not able to obtain total control, an unfortunate degradation of creditor protections.

Thus, adherence to the reasoning of Eletson will permit an imbalanced playing field to continue in favor of a debtor’s entrenched management and self-interested insiders, to the detriment of creditor interests. In doing so, courts like Eletson will continue to deny (or at best, marginalize) the remedies available to creditors under Section 1104(a). Unfortunately for the creditors of Eletson, they have experienced first-hand the costs of delay and obstruction, which could have been minimized had the Eletson court timely appointed an independent and qualified fiduciary as a Chapter 11 Trustee.

Copyright Creditor Rights Coalition 2025

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Marc S. Kirschner is Senior Advisor to Teneo. Gordon Z. Novod is a Principal at Grant & Eisenhofer P.A. and heads Grant & Eisenhofer’s bankruptcy and distressed litigation practice. The views expressed in this article are those of the individual authors and not of Teneo or Grant & Eisenhofer P.A. or their respective affiliates. Mr. Kirschner was the chapter 11 Trustee of Refco Capital Markets.

1 “Does Chapter 11 Still Work”, Hon. Robert D. Drain (Ret.), Prof. Jared A. Ellias, Prof. Robert K. Rasmussen, Robert J. Stark, and Marshall S. Huebner.

2 In re WorldCom, Inc., No. 02–13533 (AJG), 2003 WL 23966765 (Bankr. S.D.N.Y. May 16, 2003).

3 In re Eletson Holdings, Inc., et al., 659 B.R. 426, 460 (Bankr. S.D.N.Y. 2024).

4 “A Primer on Chapter 11 Trustees & Examiners”, Daniel A. Lowenthal and Kimberly Black, Patterson Belknap, New York Law Journal, April 9, 2025

5 As summarized in China Fishery Group: “There are no hard and fast rules governing the application of this provision, except that unlike under (a)(1) it is not necessary to find fault on the part of the debtor’” China Fishery Grp., 2016 WL 6875903, at *14. Marvel Entertainment held that: “[W]e are satisfied that the district court’s determination would come within proper exercise of discretion under the flexible § 1104(a)(2) standard. The level of acrimony found to exist in this case certainly makes the appointment of a trustee in the best interests of the parties and the estate.” Marvel Ent., 140 F.3d at 474.

6 A related consequence was the looming threat that if the reorganization failed, the only remaining option would be a Chapter 7 liquidation, which at that time would not have been in the best interests of creditors. Nor would seeking an Examiner under 1104 (c) have been a realistic option because it would only have added more expenses and further delay the progress of the Eletson debtors’ Chapter 11 cases while an Examiner investigated the alleged bad conduct, the Examiner would have had no power to implement a solution. “I’m just not convinced that an examiner is going to get done what needs to get done here. I think we need a decision-maker to come in and make some decisions.” See In re Marvel Entertainment, 140 F.3d at 475.

The contentious chapter 11 cases of the Tribune Company offer some anecdotal evidence that the appointment of an Examiner may do nothing to calm animosity among a debtor and its warring creditor constituencies. The Tribune debtors, the lenders who funded the buyout, and the official creditors committee agreed on a reorganization plan, only to have their pursuit of that plan delayed by a junior creditor’s successful motion to appoint an examiner, which was supported by the Office of the United States Trustee. Notwithstanding the Tribune examiner’s fulsome and well written report, that examination did not lead to a consensual plan. Rather, the animosity that had plagued Tribune continued with competing plans, and only subsided after the Court denied confirmation of both plans and laid a roadmap for the Tribune debtors to have their plan confirmed.