U.S. Trustee's Role
A recent Chapter 11 case in the Bankruptcy Court for the Northern District of Illinois, In re Caesars Entertainment Operating Company, Case No. 15-01145 (Bankr. N.D. Ill. 2015) highlights tension between the United States Trustee (UST) intended role "to act as a watchdog" and the parties' best efforts to resolve bankruptcy litigation. Caesars Entertainment Operating Co. (the "Debtor") filed for bankruptcy on January 15, 2015. After two years of contested litigation, the Debtor obtained agreement among its major creditor groups to support a plan that would release the non-debtor parent and two private equity firms in exchange for a $5 billion contribution to assist the Debtor's transition out of bankruptcy. These firms purchased the Debtor in 2008 for $30 billion and, shortly thereafter, began shifting properties and other assets out of the Debtor's portfolio and into other subsidiaries. An independently appointed bankruptcy examiner found that some of these pre-bankruptcy transfers may support claims of constructive or actual fraud-indicia of the potential ability to avoid and recover transfers for the benefit of the Debtor's estate.
Despite the support of the vast majority of its creditors, the UST filed a brief objection to the Chapter 11 plan on November 21, 2016 [Docket No. 5726] and a more an extensive objection on December 22, 2016 [Docket No. 6145]. Specifically, the UST objected to language in the plan that provided for a broad third-party release. The UST argued that Seventh Circuit precedent required liability releases to be narrowly tailored and the plan's proposed releases were too broad. The UST was particularly concerned that the third-party release would result in "blanket immunity" for the nondebtor parent and private equity firms.
While the UST noted that the Seventh Circuit had joined the Second, Third, Fifth, Sixth and Eleventh Circuits in permitting releases of non-debtor third-parties to varying degrees, the UST concluded that Seventh Circuit precedent did not permit such a broad third-party release as the one contemplated in the proposed chapter 11 plan. For example, the UST noted that under the plan in In Specialty Equipment Companies, Inc., 3 F.3d 1043 (7th Cir. 1993), creditors who obtained or voted against the Plan were deemed not to have granted the releases. No similar "opt-out" provision was provided on the proposed Chapter 11 plan. [Docket No. 6145, p. 10]. The UST also cited Airadigm Communs., Inc. v. FCC (In re Airadigm Communs., Inc.), 519 F.3d 640 (7th Cir. 2008), 519 F.3d 640 (7th Cir. 2008) for its tailored release, which retained a willful misconduct carveout. Again, the UST noted that such a carveout was not proposed in the Debtors' Chapter 11 plan. [Docket No. 6145, p. 12.] Although, this is not surprising given the bankruptcy examiner's findings concerning the questionable pre-bankrutpcy transactions. Finally, the UST referenced In re Ingersoll, Inc., 562 F.3d 856 (7th Cir. 2009), noting that courts may approve third party releases only if they are: (i) narrowly tailored; (ii) essential to the Plan as a whole; (iii) do not amount to blanket immunity; (iv) relate only to claims arising out of or in connection with the reorganization; and upon a finding (v) that each third party being released would not have participated without the release; and (vi) that each third party's participation is essential to the Plan's success. [Docket No. 6145, p. 16].
In sum, the UST argued that even if the Debtor made an adequate showing that the third party Release was essential to the Plan or its success, in the absence of evidence to support the additional factors under Ingersoll that inform the Court's decision, the Debtor has not carried its burden for confirmation. Specifically, "the release is overbroad, reaches beyond the jurisdiction of this Court and amounts to blanket immunity for the CEC Released Parties. In addition, the Third Party Release calls for numerous creditor parties to be released, such as the consenting parties to RSA's, without the requisite showing of necessity." [Docket No. 6145, p. 17.]
Ultimately, the Court confirmed the Chapter 11 plan on January 17, 2017, following a mutual resolution of the UST's objection. [Docket No. 6334.] Although the issues raised in Caesars were ultimately resolved, this case provides a warning of how the UST may be monitoring third party release language to ensure that it is not "overbroad".
Pension Benefit Guaranty Corporation's Role in Bankruptcy Cases
Governmental authorities often have a direct financial interest in restructurings. When they do, their own interpretations of statutes or regulations relevant to their interests may carry significant weight. In the case of Pension Ben. Guar. Corp. v. Durango Ga. Paper Co. (In re Durango Ga. Paper Co.), No. 02-21669, 2017 Bankr. LEXIS 160 (U.S. Bankr. S.D. Ga. Jan. 18, 2017), Judge Dalis recently held that ERISA and its regulations control the calculation of the Pension Benefit Guaranty Corporation's ("PBGC") claim because there was no conflict between ERISA and the Bankruptcy Code and no qualification of ERISA by the Bankruptcy Code. The PBGC had filed a claim against Durango Georgia Paper Company (the "Debtors"). Thereafter, the PBGC filed a Motion for Allowance of its claim, which was reviewed as a motion for summary judgment on the amended and restated objection to the claim by the Debtors. At issue was the amount of PBGC's claim for unfunded liabilities arising from the termination of the pension plan sixteen months after the Debtors' Chapter 11 filing. The Liquidating Trustee and PBGC conceded that PBGC had a valid, non-priority, general unsecured claim; however, the parties disagreed about the amount and, more specifically, the method by which the claim should be calculated.
Judge Dalis relied upon the Supreme Court's teachings in Raleigh v. Ill. Dep't of Revenue, 530 U.S. 15, 20 (2000) for its authority on the calculation of the claim: "Creditors' entitlements in bankruptcy arise in the first instance from the underlying substantive law creating the debtor's obligation, subject to any qualifying or contrary provision of the Bankruptcy Code." The bankruptcy court noted that it was undisputed that ERISA was the underlying substantive law that created the claim and required that the Valuation Regulation be used to determine the amount of the claim. See 29 U.S.C. 1301(a)(8)(A)-(b). Therefore, the question of whether the Valuation Regulation was either contrary to or qualified by the Bankruptcy Code was dispositive in deciding how the claim was calculated.
Judge Dalis disagreed with the methodology used by several circuit courts in opinions decided prior to Raleigh, specifically those courts which used the prudent investor standard. Those courts found that the bankruptcy court had the authority to decide the valuation method and Section 502(b) of the Bankruptcy Code required discounting PBGC's claims to present value. See In re LTV Corp. PGC (In re Chateaugay Corp.), 126 B.R. 165, 175 (Bankr. S.D.N.Y. 1999), aff'd, 130 B.R. 690 (S.D.N.Y. 1990), vacated, 17 Empl. Benefits Cas. (BNA) 1102 (S.D.N.Y. 1993) ("[C]laims for a series of cash payments in the future should be discounted to present value by a discount factor which when prudently invested would allow the obligations to be met as they become due.")
According to Judge Dalis, the more recent and better reasoned cases view claims such as PGBC's to be a present right granted by statute to recover an amount determined under ERISA, instead of a stream of future payments for which the debtor is liable. Durango, 2017 Bankr. LEXIS 160, at *7 (citing In re U.S. Airways Group, Inc., 303 B.R. 784, 793 (Bankr. E.D. Va. 2003) ("Here, both the debtor's liability to the PBGC and the amount of the liability are not only creatures of statute, but of the same statute.")). Accordingly, the Valuation Regulation was not contrary to or qualified by Section 502(b) of the Bankruptcy Code. "First, the [c]laim is not a claim for future payments; it is an obligation that is enforceable now. Second, the PBGC was authorized by statute to determine the amount of the Claim, and its determination under the Valuation Regulation is binding on the Debtors and therefore on this Court." Id. at *8-9.
The Liquidating Trustee also argued that the Valuation Regulation conflicts with the Bankruptcy Code's requirements that the amount of the claim be determined as of the petition date. However, the court disagreed with this interpretation, holding that "[a]s of the petition date, the PBGC had an unliquidated contingent claim that under the substantive law of ERISA became fixed as to liability and amount...sixteen months later." Id. at *10.
The court also rejected the Liquidating Trustee's argument that the Valuation Regulation was contrary to Section 1123(a)(4) of the Bankruptcy Code requiring that a Chapter 11 plan provide the same treatment for each claim or interest in a particular class. Essentially, the Liquidating Trustee argued that treating the PBCG like any other general unsecured creditor meant valuing the claim under the "prudent investor" standard. However, the Court disagreed, citing US Airways, 303 B.R. at 794 ("So long as all claims are determined in accordance with applicable nonbankruptcy law, there cannot be any genuine issue of disparate treatment.").
In the wake of Durango, uncertainty about whether courts will require calculation of the PGBC's claim in future cases under the Valuation Regulation pursuant to ERISA or the "prudent investor" standard will continue.
The complete article, The Role of the United States Trustee and Pension Benefit Guaranty Corporation in Recent Bankruptcy Cases," first appeared in the ABA Business Bankruptcy Committee Newsletter in August 2017.