## Facts

- Eastern Air Lines, Inc. and affiliate Ionosphere Clubs, Inc. filed voluntary Chapter 11 petitions on March 9, 1989, and continued operating as debtors-in-possession.
- Eastern was controlled by its parent company, Texas Air Corporation, and had suffered severe operational and financial decline before bankruptcy.
- The court appointed an examiner under 11 U.S.C. § 1104(c) to investigate prepetition transactions between the debtors and Texas Air and its affiliates.
- After an eight-month investigation, the examiner issued a report (filed March 1, 1990) describing extensive intercompany dealings and raising questions about the fairness of certain prepetition transactions.
- The Official Committee of Unsecured Creditors moved to appoint a Chapter 11 trustee under 11 U.S.C. § 1104(a), alleging severe, persistent mismanagement and breaches of fiduciary duty by existing management.
- The committee also argued that repeated forecasting failures, lack of coherent long-term strategy, and plan-related disputes diminished the likelihood of successful reorganization and harmed unsecured creditors.
- The debtors opposed the motion, emphasizing the need for operational continuity in a large airline reorganization and the existence of multiple oversight mechanisms (court, U.S. Trustee, examiner, and committee).

## Issues

1. Whether “cause” existed under 11 U.S.C. § 1104(a)(1)—including fraud, dishonesty, incompetence, or gross mismanagement by current management—to require appointment of a Chapter 11 trustee.
2. Whether, under 11 U.S.C. § 1104(a)(2), appointing a trustee was in the interests of creditors, equity security holders, and other interests of the estate, considering disruption, cost, and reorganization prospects.

## Decision

- The court denied the motion to appoint a Chapter 11 trustee.
- The court held the committee did not prove “cause” under § 1104(a)(1) by clear and convincing evidence.
- The court held the committee also failed to show that a trustee would better serve the interests of creditors and the estate under § 1104(a)(2).
- Eastern and Ionosphere Clubs remained debtors-in-possession, subject to continued oversight and potential future relief if circumstances warranted.

## Legal Principles

- Appointment of a Chapter 11 trustee under § 1104(a) is an extraordinary remedy; Chapter 11 generally favors leaving the debtor in possession.
- The movant must establish grounds for a trustee by clear and convincing evidence, not merely by showing poor results or disagreements over business judgment.
- Under § 1104(a)(1), disappointing performance and failed projections do not, without more, constitute “fraud, dishonesty, incompetence, or gross mismanagement.”
- An examiner’s investigation into insider or related-party transactions may support monitoring and potential litigation but does not automatically require displacement of management.
- Under § 1104(a)(2), courts weigh practical effects on the estate, including operational disruption, reorganization feasibility, administrative cost, and delay—especially in large, complex operating businesses.

## Conclusion

The court refused to appoint a Chapter 11 trustee because the unsecured creditors’ committee did not clearly and convincingly establish statutory “cause,” and the court found that replacing management risked substantial disruption and expense without a demonstrated net benefit to creditors or the estate.


In re Ionosphere Clubs, Inc., 113 B.R. 164 (Bankr. S.D.N.Y. 1990)