## Facts

- Sharon Steel Corporation, a steel manufacturer, filed a voluntary Chapter 11 petition on April 17, 1987, reporting liabilities substantially exceeding assets and facing urgent creditor pressure.
- Victor Posner, Sharon’s chairman, president, and CEO, controlled Sharon’s management and a related entity, DWG Corporation, which provided financial management services to Sharon.
- Sharon’s operations required major capital expenditures: a key blast furnace was shut down pending expensive repairs, and another faced imminent shutdown due to overdue maintenance.
- The Official Committee of Unsecured Creditors sought appointment of a Chapter 11 trustee under 11 U.S.C. § 1104, citing:
  - prepetition transfers of Sharon assets to entities under common control, raising self-dealing concerns; and
  - postpetition mismanagement, including failure to close prepetition books and failure to renegotiate a high-interest capital loan.
- DWG and Posner argued the committee was contractually barred from seeking a trustee based on a purported stipulation.
- The bankruptcy court appointed a trustee and rejected enforcement of the purported stipulation; the district court affirmed.

## Issues

1. Whether the bankruptcy court abused its discretion or committed legal error by appointing a Chapter 11 trustee for cause under 11 U.S.C. § 1104 based on asserted prepetition self-dealing and postpetition mismanagement.
2. Whether a binding stipulation existed that prohibited the unsecured creditors’ committee from moving for appointment of a Chapter 11 trustee.

## Decision

- The Third Circuit affirmed the district court’s judgment upholding both bankruptcy court rulings.
- The court held no enforceable stipulation barred the committee’s trustee motion because the alleged agreement was incomplete, not finalized, and not approved by the bankruptcy court, and its conditions had expired.
- The court held the trustee appointment was supported by clear and convincing evidence of cause under § 1104, including evidence of prepetition insider-related transfers and continuing postpetition management failures.
- The court rejected the argument that asserted postpetition corrective measures required denial of the trustee motion where the record supported ongoing concerns about management reliability and conflicts.

## Legal Principles

- A Chapter 11 trustee may be appointed for “cause” under 11 U.S.C. § 1104 upon clear and convincing evidence; the appointment decision is reviewed for abuse of discretion.
- Evidence of insider transactions and conflicts of interest, coupled with demonstrated operational or financial mismanagement, can establish cause to displace debtor-in-possession management.
- Postpetition remedial steps do not necessarily eliminate cause where the bankruptcy court reasonably finds a continuing pattern of mismanagement or insufficient confidence in management’s neutrality and competence.
- A purported stipulation affecting core Chapter 11 governance is not enforceable where it is indefinite, incomplete, expired by its own terms, or lacks required bankruptcy court approval.
- Private arrangements cannot negate the bankruptcy court’s statutory authority to appoint a trustee to protect the estate and creditors.

## Conclusion

The Third Circuit sustained appointment of a Chapter 11 trustee for Sharon Steel because clear and convincing evidence showed prepetition insider-related transfers and postpetition mismanagement, and it held that an unapproved, incomplete, and expired stipulation did not bar the unsecured creditors’ committee from seeking a trustee.


In re Sharon Steel Corp., 871 F.2d 1217 (3d Cir. 1989)