## Facts

- Cardinal Industries, Inc. and Cardinal Industries of Florida, Inc. filed voluntary Chapter 11 petitions and operated as debtors-in-possession.
- The companies’ business involved modular housing and real estate projects held through multiple limited partnerships financed by first mortgages.
- Cardinal made second-mortgage loans to certain partnerships and intended to repay those loans through syndication sales of partnership interests, but the syndication program was largely unsuccessful.
- Rental income from projects proved insufficient to service first-mortgage debt, leading to defaults and liquidity strain.
- Before bankruptcy, management advanced about $11 million to partnerships to address investor pressure, worsening the companies’ financial condition.
- After filing, the debtors reduced costs but continued to incur operating losses during the Chapter 11 cases.
- The debtors proposed reorganization concepts requiring complex restructurings, reliance on management valuations, and delayed recoveries for unsecured creditors.
- Creditors’ committees asserted the debtors failed to provide accurate, timely financial information and that the debtors’ records were unreliable.
- Creditor trust deteriorated due to continued losses, inadequate reporting, questionable business judgment, and the debtors’ decision to discharge counsel during lender negotiations.
- Unsecured creditors’ committees moved to appoint Chapter 11 trustees under 11 U.S.C. § 1104(a).

## Issues

1. Whether “cause” existed under 11 U.S.C. § 1104(a)(1)—including incompetence or gross mismanagement before or after the petition date—requiring appointment of a Chapter 11 trustee.
2. Whether a trustee should be appointed under 11 U.S.C. § 1104(a)(2) because appointment would be in the interests of creditors and the estate, given loss of creditor confidence and deficient disclosures.

## Decision

- The court granted the motions and ordered appointment of Chapter 11 trustees for both debtors.
- The court found sufficient grounds to displace the debtors-in-possession despite the general Chapter 11 preference for leaving management in control.
- The court concluded that continuing losses, unreliable financial information, and management decisions that impaired negotiations justified replacing management with an independent fiduciary.
- The court held that, even without clear proof of intentional fraud, the committees’ loss of confidence was justified by objective conditions and supported trustee appointment.

## Legal Principles

- A debtor-in-possession is a fiduciary and must maintain and provide accurate, timely financial information; serious reporting deficiencies may support “cause” under § 1104(a)(1).
- The presumption favoring debtor control in Chapter 11 is rebuttable; when § 1104(a) standards are satisfied, the court must order trustee appointment.
- “Cause” may be shown by patterns of poor judgment, persistent losses, and deficient internal controls, even absent classic fraud.
- A justified loss of creditor confidence, supported by concrete failures in performance and disclosure, can be probative of “cause” and can also support appointment under § 1104(a)(2).
- Under § 1104(a)(2), the court may appoint a trustee when an independent fiduciary is likely to improve credibility, transparency, and negotiations, thereby better protecting estate value.

## Conclusion

The court appointed Chapter 11 trustees because the debtors’ continuing post-petition losses, unreliable financial reporting, and management decisions produced a justified breakdown in creditor confidence and made independent oversight necessary under § 1104(a) to protect creditor and estate interests.


In re Cardinal Indus., Inc., 109 B.R. 755 (Bankr. S.D. Ohio 1990)