MEMORANDUM OPINION OVERRULING OBJECTIONS TO THE AMENDED JOINT PLAN OF REORGANIZATION, CONFIRMING PLAN AND RECOMMENDING THE AFFIRMATION OF CONFIRMATION AND OF THE § 524(g) INJUNCTION
JUDITH K. FITZGERALD, Bankruptcy Judge.
Before the Court is the confirmation of The Flintkote Company ("Flintkote") and Flintkote Mines Limited's ("Mines," and collectively with Flintkote, the "Debtors") Amended Joint Plan of Reorganization (as modified November 16, 2011), docketed at Doc. No. 6336
From 1917 until 1987, Flintkote was primarily in the business of manufacturing, processing, and distributing building materials.
Mines was founded in 1945 as a Canadian subsidiary of Flintkote. Mines operated an asbestos mining facility as Flintkote's subsidiary until 1971, when it was sold. From its founding until 1980, when it ceased major operations, Mines engaged in mining and brokering raw asbestos.
Asbestos-related lawsuits were filed against Flintkote beginning in the early 1970s
The key component of the Plan is the creation of a § 524(g) trust, which will assume all liability for current and future asbestos personal injury claims against both Flintkote and Mines. Plan § 4.4. The majority of the Debtors' assets will be transferred to the trust, including (1) all of the stock of reorganized Flintkote; (2) all cash held by the Debtors as of the effective date, less approximately $49 million in reserve cash and real estate holdings; (3) the Trust Causes of Action and all proceeds thereof; (4) all funds on deposit in the Qualified Settlement Fund;
The Trust will use these assets to pay holders of Asbestos Personal Injury Claims in accordance with the "Asbestos Personal Injury Trust Agreement" (the "Trust Agreement") and the "Asbestos Personal Injury Trust Distribution Procedures" (the "TDP"). The Trust Agreement and TDP provide for the valuation and payment of asbestos personal injury claims. Plan § 4.1.2.
The Trust will serve as a liquidating trust for Mines, which is not seeking a discharge under § 1141 or protection under § 524(g). Id. As noted above, Mines ceased major operations in 1980 and, as of Flintkote's petition date in 2004, had ceased all operations.
Holders of secured, administrative, and priority claims will be paid in full under the Plan.
The Plan is designed to be "insurance neutral," and provides that all Asbestos Insurance Actions and related claims and causes of action are preserved for the benefit of the Trust. See Plan § 11.7. Nothing in the Plan limits in any way the ability of any Asbestos Insurance Company to assert any available coverage defenses.
The Debtors solicited votes on the Original Amended Plan from the holders of Claims and Equity Interests in Classes 5 (Unsecured Claims Against Flintkote), 6 (Unsecured Claims Against Mines), 7 (Flintkote Asbestos Personal Injury Claims), and 8 (Mines Asbestos Personal Injury Claims), (together, the "Voting Classes").
Because the first plan could not encompass a § 524(g) injunction, the Plan Proponents made certain changes to the Original Amended Plan and the TDP in an attempt to acquire the necessary super-majority of votes from Class 7. The Plan Proponents filed new versions of the Plan on June 22, 2009, and July 20, 2009, along with the Supplemental Disclosure Document Regarding Amended Joint Plan of Reorganization ("Supplemental Disclosure Document"), at Doc. No. 4327, as further modified on July 20, 2009, at Doc. No. 4392. This Court approved the Supplemental Disclosure Document and on July 31, 2009, ordered the Plan Proponents to re-solicit votes from Classes 7 and 8.
Flintkote's Post-Confirmation Operations
Flintkote intends to pursue what it alleges are five separate business lines
Flintkote's real estate operations consist of owning and managing the leasing of six "quick-service restaurant properties," which Flintkote purchased with portions of its recovered insurance assets, upon Court approval, during the course of the bankruptcy proceedings. All of these properties are leased under triple-net leases through 2023 with quick-service restaurant operators such as McDonald's USA and Carrols Corporation.
Consulting and Executive Management Services
Flintkote has a contract with Plant Insulation Company ("Plant"), which is itself subject to a confirmed plan in bankruptcy, to provide consulting and executive management services. The bankruptcy court presiding over Plant's bankruptcy case approved the renegotiation of the executive consulting agreement between Flintkote and Plant. Plant paid Flintkote $968,000 for consulting and executive management services as of October 31, 2011, and Flintkote is eligible to receive a $1 million dollar success fee upon Plant's successful emergence from bankruptcy. On March 15, 2012, Plant's § 524(g) plan was confirmed by Bankruptcy Judge Thomas Carlson. See In re Plant Insulation Co., 469 B.R. 843 (Bankr. N. D. Cal. 2012).
The Plan contemplates that Flintkote will provide claims management services to the Trust created under its Plan pursuant to a Trust Services Agreement,
Under the Trust Services Agreement, Flintkote will also provide services to the Trust beginning on the effective date. Flintkote will assist with trust management and control, dispute and litigation management, accounting and financial services, insurance recovery, and records and logistics services. These activities will also be provided by Flintkote at cost, which will save the Trust from having to pay market rates to third party vendors. Flintkote is pursuing other clients for these services, but, as of yet, none has been retained.
Dividend Recovery Litigation
Post-confirmation, Flintkote will continue to manage the Dividend Recovery Litigation ("DRL") against ITCAN in the California Superior Court. The DRL will be described in greater detail below, but it suffices to say here that Flintkote is pursuing damage claims against ITCAN for fraudulent conveyance, wrongful dividend, breach of fiduciary duty, recission and other related theories, arising in connection with ITCAN's alleged hostile takeover of Flintkote. Flintkote will be entitled to retain 2% of any net recovery from the DRL to fund its ongoing business operations. The remaining 98% will be transferred to the Trust. Under the Plan, the Trust will fund all of Flintkote's expenses related to the DRL and may join Flintkote as co-plaintiff.
The issue of whether ITCAN has standing to raise its objections has been extensively briefed by the parties. We will address the standing issue before turning to the merits of ITCAN's objections. "To object to the confirmation of a reorganization plan in bankruptcy court, a party must, in the first instance, meet the requirements for standing that litigants in all federal cases face under Article III of the Constitution." In re Global Indust. Techs., Inc., 645 F.3d 201, 210 (3d Cir. 2011) ("GIT"). There are three elements that must be established for a party to establish standing under the Constitution. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992). First, constitutional standing requires an "injury in fact" that is "concrete," "distinct and palpable," and "actual or imminent." Id. (quoting Whitmore v. Ark., 495 U.S. 149, 155 (1990)). Second, "there must be a causal connection between the injury and the conduct complained of," Lujan, 504 U.S. at 560, which means that the injury must be "fairly trace[able] to the challenged action." Simon v. E. Ky. Welfare Rights Org., 426 U.S. 26, 41-42 (1976). Here, the challenged action is confirmation of the Plan. Third, there must be a likelihood that a favorable decision will redress the injury. Lujan, 504 U.S. at 561.
Parties in interest also have standing to object to confirmation of a plan under § 1109(b), which states: "[a] party in interest, including the debtor, the trustee, a creditor's committee, an equity security holders' committee, a creditor, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter." The court in GIT defined a "party in interest" as "anyone who has a legally protected interest that could be affected by a bankruptcy proceeding"
ITCAN argues first that it is a creditor, and thus by definition a "party in interest" with standing to object to confirmation. Secondly, ITCAN argues that even if it is not a creditor of the estate it is still a "party in interest" because the Plan impairs various rights and defenses it has with respect to both Flintkote and individual asbestos plaintiffs in the DRL. A summary of the DRL will be helpful before turning to the merits of ITCAN's standing arguments.
In April of 2006, two years into bankruptcy, Flintkote along with Marlene Hopkins, Michelle Hopkins, and Michael Hopkins (the "Hopkins Plaintiffs")
The Plan Proponents also sought a declaration that ITCAN was Flintkote's alter ego for purposes of determining liability for asbestos personal injury claims against Flintkote. The purpose of the Hopkins Plaintiffs joining in the DRL was that, at the time the DRL was commenced, California law was unclear whether a bankruptcy trustee (or debtor-in possession) or an individual asbestos claimant was the proper party to bring an alter ego claim. Flintkote and the Hopkins Plaintiffs jointly asserted the claim, so that at least one of the plaintiffs would be the proper party, which would facilitate the Superior Court in reaching the merits of the alter ego claims. The Plan Proponents opined that if they were successful in their alter ego suit, res judicata and collateral estoppel would prevent ITCAN from denying its alter ego status in separate alter ego actions, to the benefit of all current and future creditors of Flintkote.
On January 6, 2012, Judge Richard Kramer of the Superior Court issued an official Statement of Decision in the DRL, holding that the Plan Proponents lacked standing to pursue alter ego relief against ITCAN (the "California Decision").
The Plan Proponents elected not to appeal the California Decision
In summary, the Plan Proponents will continue to pursue, post-confirmation, their pending claims in the DRL other than the alter ego claim. The alter ego claim will not be pursued against ITCAN post-confirmation by the Plan Proponents, but the question remains whether the Plan Proponents can formally abandon it in the Plan when it has already been determined that Flintkote lacks standing to assert that claim under California law.
ITCAN's Alleged Creditor Standing
We now turn to ITCAN's arguments that it has standing to object to confirmation. ITCAN argues that it is a "party in interest" because it is a "creditor," which is an express category of parties in interest under § 1109(b). ITCAN asserts creditor status based upon: (i) an alleged claim for contribution and indemnity against Flintkote in the event that any party recovers from ITCAN on grounds that ITCAN is Flintkote's alter ego for purposes of asbestos liability; and (ii) an alleged claim for contribution and indemnity against Flintkote to the extent ITCAN has to pay to remediate environmental contamination at a property formerly owned by Flintkote.
Prior to the decision in JELD-WEN, Inc. v. Van Brunt (In re Grossman's Inc.), 607 F.3d 114 (3d Cir. 2010) ("Grossman's"), ITCAN maintained that it held a future demand for contribution and indemnification in the event it was ever liable under an alter ego theory. ITCAN's position was that, under Avellino & Biens v. M. Frenville Co. (In re M. Frenville Co.), 744 F.2d 332 (3d Cir. 1984) ("Frenville"), it could not file a proof of claim until a right to payment arose—i.e. until ITCAN was adjudicated to be Flintkote's alter ego. After Grossman's was decided, ITCAN argued that the change in law as to when a claim arises meant that it could file a proof of claim when it could not previously, and so sought leave to file a late proof of claim.
ITCAN cites to the recent decision in Wright v. Owens Corning, 679 F.3d 101 (3d Cir. 2012), as support for its argument that, despite this Court's Order denying ITCAN's request to file a late proof of claim, the ruling in Grossman's should nevertheless allow ITCAN to assert its alter ego contribution claim.
The Court of Appeals reasoned that, by the time Grossman's was decided, "the bar date had passed, the Confirmation Order had been entered, and the Confirmation Date had occurred, each of which affected the Plaintiffs' newfound claim status without an opportunity for them to be heard. Due process affords a re-do in these special situations to be sure all claimants have equal rights." Id. at 108. However, the situation facing ITCAN is inapposite to the situation facing the plaintiffs in Wright. In Wright, the plaintiffs were unknown and had no idea at the time of Owens Corning's bankruptcy that they had any right of payment against the debtor. In this case, ITCAN has been fully involved in the Debtors' bankruptcy case since 2006, and did not seek to file a late proof of claim until four years after the DRL was commenced, despite this Court's announcement to ITCAN in 2008 that this Court's view is that Frenville did not excuse ITCAN from filing its contingent claim. Flintkote suggests that ITCAN strategically chose not to file a proof of claim because it wanted to avoid submitting to the jurisdiction of this Court. Regardless of whether that is the case, the fact remains that this is not a "special situation" where ITCAN was an unknown claimant who was unaware of the fact that Flintkote is in bankruptcy or that ITCAN might eventually be liable as Flintkote's alter ego with respect to Flintkote's asbestos liability. ITCAN has always held a contingent claim with respect to its alter ego contribution theory, and nothing in Frenville states that the law prohibits it from filing that claim.
Furthermore, a belief that filing a proof of claim would be futile,
To the extent that ITCAN may have a claim in the future against Flintkote related to alter ego liability, that claim is speculative and cannot confer "party in interest" standing to object to plan confirmation. As noted above, the injury in fact must be "actual and imminent," and here the injury is far from imminent. The following contingencies exist and must be satisfied before an injury exists: (1) an asbestos plaintiff must establish the merits of the asbestos personal injury claim; (2) an asbestos plaintiff must prevail on alter ego grounds against ITCAN;
Whether or not all these events will come to pass at some time in the future is entirely speculative. Thus, the alleged injury is simply not "actual and imminent." In addition, ITCAN has denied throughout this entire bankruptcy case that it is Flintkote's alter ego. Moreover, ITCAN has stated several times that even if it is found to be Flintkote's alter ego, it will not pay anything to asbestos victims because, as a Canadian company with its assets in Canada, no judgment would be enforceable against it.
In ITCAN's motion to file a late proof of claim based upon an alter ego contribution and indemnity theory, ITCAN also sought leave to file late proofs of claim with respect to two claims under the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. § 9607 et seq. ("CERCLA"). The first claim under § 107 of CERCLA sought approximately $13,000 in attorneys' fees incurred in identifying Flintkote as a potentially responsible party with respect to a site that Flintkote previously owned and on which there was environmental contamination. The second was a contingent claim for contribution and indemnity against Flintkote for cleanup costs that ITCAN might have to incur in the future in remediating environmental contamination at the site.
The Court granted ITCAN leave to file the CERCLA claim for contribution and indemnity related to cleanup costs under § 502(e)(1)(B), which provides that claims for reimbursement or contribution of an entity that is liable with the debtor on or has secured the claim of a creditor shall be disallowed to the extent that "such claim . . . is contingent as of the time of allowance or disallowance of such claim." As ITCAN's claim was contingent, the Court disallowed the claim.
As to the claim for attorneys' fees under § 107 of CERCLA, the Court granted ITCAN leave to file an out-of-time proof of claim, though the Order granting leave deemed that claim disputed and provided that the claim would be adjudicated as long as the Debtors objected to the proof of claim. The Debtors did object to the proof of claim, the claim was adjudicated, and the Court ultimately disallowed the claim on the grounds that attorneys' fees incurred in "identifying" Flintkote to the New York Department of Environmental Conservation (NYDEC), when Flintkote was already known to NYDEC as a potentially responsible party, were not recoverable under § 107. In disallowing the § 107 CERCLA claim, the Court held that ITCAN did "not have standing to object to the plan of reorganization on the basis of that claim."
Impairment of Rights/Defenses
Although ITCAN is not a creditor, that does not preclude a finding that it is a "party in interest" with standing to object to Plan confirmation under § 1109(b). ITCAN contends it is a "party in interest" regardless of whether it is a creditor because the Plan impairs its rights in several ways, which will be described in greater detail below.
ITCAN points to the recent decision in GIT as a basis for its argument that it has broad, "party in interest" standing. Before addressing ITCAN's arguments in this regard, a brief background on GIT will be helpful.
In GIT, the Court of Appeals reversed the district court's affirmance of this Court's holding that a group of insurers of silica claims did not have standing to object to plan confirmation, and its affirmance of this Court's confirmation of the debtors' § 524(g) plan. In 1998, GIT acquired a company, A.P. Green Industries, Inc. ("APG"), which, until the mid 1970s, had manufactured various refractory products, many including asbestos, resulting in massive asbestos liability and ultimately forcing APG and GIT (and other related entities) into chapter 11. As of 2002, approximately 235,000 asbestos personal injury claims were pending against APG. APG also faced silica-related personal injury claims, though on a much smaller scale. As of 2002, APG had only one silica-related lawsuit pending against it.
The GIT plan called for the creation of two trusts, one for asbestos claims and one for silica claims. Both trusts were to be funded through insurance, either through cash from insurance policy settlements or by assigning certain insurance policies to the trusts. It was the silica trust that drew insurers' objections to confirmation. The plan was designed to be "insurance neutral," in the vein of Combustion Engineering, as to the insurers whose policies were assigned to the trusts, so that all contractual rights and coverage defenses would be fully preserved. We held that certain non-creditor insurers lacked standing to object to confirmation. We reasoned, inter alia, that any harm these insurers faced was speculative, because the relevant insurers had been required to pay nothing toward the liability as of that time. We also rejected the argument that the insurers were harmed by the assignment of the policies to the trusts in contravention of the anti-assignment provisions written in the policies, because those provisions were made null and void by virtue of the bankruptcy and other state law. The insurers' ability to raise defenses was preserved to coverage litigation should it ever occur. The District Court affirmed our holding with respect to standing and affirmed confirmation of the plan.
The Court of Appeals reversed, reasoning that insurance neutrality "is a meaningful concept where, as in Combustion Engineering, a plan does not materially alter the quantum of liability that the insurers would be called to absorb."
Turning back to the present case, ITCAN argues that, like the objecting insurers in GIT, it has a legally protected interest that is adversely affected by the Plan such that ITCAN has standing to object to confirmation. We disagree. First, GIT addressed a silica trust formed pursuant to § 105, not an asbestos trust under § 524(g). Secondly, no assets of ITCAN are being transferred to the Trust, unlike the insurance at issue in GIT. Further, most of what ITCAN complains of with respect to the Plan arises from the operation of § 524(g), other provisions of the Bankruptcy Code, or the fact that Flintkote is a co-insured with ITCAN's subsidiary, Genstar. None of the harm ITCAN complains of is created by the Plan or the TDP. For instance, ITCAN complains that "the Plan, through the creation of the proposed Trust and the related channeling injunction, will effectively remove Flintkote, as the asbestos tortfeasor, from any future litigation involving its role in the underlying torts themselves."
ITCAN advances several other arguments as to how the Plan allegedly affects its rights and defenses with respect to asbestos liability which are sometimes based on a misapprehension of the Plan and, sometimes, are simply incorrect. For example, ITCAN argues that the Plan "threatens to impose asbestos tort liability on ITCAN and compromise ITCAN's ability to defend itself against that liability." Opposition Brief, at 44. First, nothing in the Plan imposes tort liability on ITCAN. Any liability of ITCAN's, as may be determined in suits pending in other courts, is the result of its own pre-petition conduct. Regardless of whether or not this Plan is confirmed, individual asbestos victims may still bring alter ego claims against ITCAN in the tort system. Section 524(g) does not protect non-debtor entities unless, pursuant to § 524(g)(4), such entities qualify and contribute to the funding of the trust, which ITCAN elected not to do in this case. The Plan itself does not increase ITCAN's tort liability in any way.
Secondly, while ITCAN argues that it will not have "Flintkote's defenses available to it, as the Plan transfers to the proposed Trust the ability to assert and waive Flintkote's defenses in its discretion,"
Flintkote's Abandonment of its Alter Ego Claim
As noted above, Judge Kramer determined in the California Decision that the individual Hopkins Plaintiffs could bring an alter ego claim against ITCAN, but under California law, Flintkote could not. The Plan Proponents, rather than appealing or filing suit in other jurisdictions, instead sought to formally abandon the estate's alter ego claim against ITCAN, on the premise that they did not wish to inadvertently impair the ability of the individual Hopkins' Plaintiffs or any other individual asbestos personal injury plaintiffs to bring their own alter ego claims against ITCAN. The Plan Proponents cite St. Paul Fire & Marine Insurance Co. v. PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989) ("St. Paul"), and Koch Refining v. Farmers Union Central Exchange, Inc., 831 F.2d 1339 (7th Cir. 1987) ("Koch"), as two cases that stand for the proposition that if an alter ego claim is part of a debtor's estate, the estate must abandon the claim before it can be asserted by individual creditors of the debtor. To avoid inadvertent prejudice to individual asbestos plaintiffs, on November 16, 2011, the Plan Proponents amended the Plan to reflect the abandonment of Flintkote's ITCAN-related alter ego claim. Flintkote then moved under Fed. R. Bankr. P. 3019 for an order that the modifications made to the second amended plan do not materially and adversely affect voting creditors.
ITCAN objects to Flintkote's purported abandonment of its alter ego claim. In ITCAN's view, Flintkote's alter ego claim against ITCAN is non-existent by virtue of the California Decision. ITCAN contends that only property of the estate can be abandoned under § 554, and because Flinktote's alter ego claim cannot be property of the estate if it does not exist, Flintkote cannot abandon the alter ego claim. ITCAN argues that even if Flintkote's alter ego claim constitutes property of the estate, it can be abandoned only to Reorganized Flintkote, not to individual creditors. ITCAN argues that the California Decision created res judicata and collateral estoppel defenses that are impaired by Flintkote's purported abandonment. ITCAN asserts it is impaired by the abandonment to the extent such abandonment bolsters the alter ego claims held by individual plaintiffs.
Section 554(a) provides that "[a]fter notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate." § 554(a). What constitutes "property of the estate" is generally determined by state law. Butner v. United States, 440 U.S. 48, 55 (1979).
The Plan Proponents point out that there is a great deal of ambiguity regarding whether an alter ego claim or remedy constitutes property of the estate. First, "alter ego" is sometimes treated not as a cause of action or claim, but rather as an equitable remedy.
The Plan Proponents argue that it is precisely this ambiguity that makes abandonment appropriate here. The Plan Proponents do not seek any rulings on the merits of ITCAN-related alter ego claims or any of ITCAN's defenses to such claims. The Plan Proponents seek only to make clear in the Plan that to the extent either of the Debtors' estates hold ITCAN-related alter ego claims, it is the Debtors' intention to abandon those claims to avoid potentially impairing the interests of creditors. The Plan Proponents assert that any alter ego claim can be abandoned without a determination of whether it is an estate asset, if abandoning the claim will prevent undue prejudice or confusion as to who has standing to bring the claim. In support, the Plan Proponents cite In re De Hertogh, 412 B.R. 24 (Bankr. D. Conn. 2009). In In re De Hertogh, individual Chapter 7 debtors sought to sue their bankruptcy attorney for malpractice, but had their suit dismissed without prejudice for failure to name the bankruptcy trustee as plaintiff. De Hertogh, 412 B.R. at 27. The trustee then attempted to abandon the estate's interest in the suit so that the debtors could pursue the claim. The Court held that the claim arose post-petition and thus did not belong to the estate, but to the individual debtors. Notwithstanding that finding, the Court approved the abandonment "in the interest of clarity and to preclude the potential for further litigation concerning the Debtors' standing to proceed in state court." Id. at 31.
We agree with the Plan Proponents that abandonment of the alter ego claim, to the extent the estate holds one, is appropriate in this instance in order to avoid potentially impairing the interests of individual plaintiffs. ITCAN argued in the California Superior Court, and Judge Kramer specifically held, that the Hopkins Plaintiffs, but not Flintkote, have standing to pursue alter ego relief against ITCAN.
Furthermore, a fair reading of the California Decision indicates that while Flintkote cannot currently bring an alter ego claim against ITCAN, that does not necessarily mean that such a claim does not exist. The California decision provides that "[a]s of now, Flintkote has no present, liquidated, and precisely framed claim against [ITCAN]."
The parties also disagree on the effect of abandonment. Section 554 does not specify to whom property may be abandoned. ITCAN contends that property of the estate that is abandoned by the trustee or debtor-in-possession may only be abandoned to the debtor. The Plan Proponents take the position that the abandoned property does not necessarily go back to the debtor, but rather to whomever has a possessory interest in the property. We note that the Plan does not attempt to abandon the claim to anyone in particular, nor do the Plan Proponents seek a determination as to whom the claim should be abandoned.
We agree that "abandonment is to the person having the possessory interest in the property." White v. Coon (In re Purco, Inc.), 76 B.R. 523, 532 (Bankr. W.D. Pa. 1987). See also Collier's on Bankruptcy, § 5-554, Fitzgerald, Gonzalez, & Walrath, Rutter Group Practice Guide: Bankruptcy § 6:416 (The Rutter Group 2012) ("Although section 554 does not specify to whom property is abandoned, property may be abandoned by the trustee to any party with a possessory interest in it."). As noted above, the determination of who may have a possessory interest in the alter ego claim is not a question for today. The Plan Proponents want only to disclaim any interest in pursuing alter ego relief so as not to cause inadvertent prejudice to anyone else, which the Court finds to be proper.
As ITCAN's objections to Plan confirmation with respect to the DRL have revolved around the alter ego aspect, now that Flintkote has elected not to continue to pursue the alter ego claim against ITCAN, the Court finds that the Plan does not adversely impact ITCAN and is not a basis for "party in interest" standing. The Court finds no basis on which to sustain ITCAN's objection to the Plan by virtue of the abandonment of the alter ego claims, and that objection is overruled.
ITCAN also objects that its rights are impaired by the Plan because Flintkote shares certain insurance assets with ITCAN's subsidiary, Genstar. ITCAN claims that once a plan is confirmed, the TDP accompanying the Plan will allow the Trust to deplete the insurance coverage. We find the TDP is not the source of insurance depletion. First, the shared insurance assets have always been available to either Genstar or Flintkote on a first-come, first-served basis, which will continue to be the case post-confirmation. Thus, shared insurance will be used in that fashion to pay Flintkote's asbestos liabilities and Genstar's insured liabilities regardless of whether Flintkote's Plan is confirmed. Flintkote's "Asbestos Insurance Actions" are being transferred to the Trust under the Plan, but "without prejudice to the rights of any co-insureds." Plan § 11.7 Section 12.3.2(b) of the Plan makes clear that it preserves "the rights of any co-insured of the Debtors (x) with respect to any Asbestos Insurance Policy or Asbestos Insurance Settlement Agreement or against any Asbestos Insurance Company and (y) as specified under any Final Order of the Bankruptcy Court approving an Asbestos Insurance Settlement Agreement." Thus, the Court finds that any injury caused by depletion of shared insurance assets is not traceable to the Plan but is the result of the sequence in which insurance claims have been and will be made, processed, and paid under the terms of the policies.
For these reasons, ITCAN has not shown an injury caused by the Plan for which this Court can provide a remedy. Thus, ITCAN is without "party in interest" standing.
ITCAN's Objections to Confirmation
Despite ITCAN's lack of standing, the Court has fully considered ITCAN's objections to confirmation. The Court agrees with ITCAN that the Court has an affirmative duty to determine whether each provision of § 1129 is satisfied, regardless of the absence of valid confirmation objections. In re Lernout & Hauspie Speech Prods., N.V., 301 B.R. 651, 656 (Bankr. D. Del. 2003). ITCAN raises either purely legal issues that require no discovery or fact questions as to which the Court authorized discovery and conducted a trial. Thus, there is a full and complete record on which to rule.
ITCAN objects to Plan confirmation on two principal grounds. First, ITCAN argues that the Plan is not confirmable because under Jeld-Wen, Inc. v. Van Brunt (In re Grossman's Inc.), 607 F.3d 114 (3d Cir. 2010) ("Grossman's"): (1) the Debtors cannot show that they will likely be subject to "substantial future demands as required by § 524(g)(2)(B)(ii); and (2) the Debtors failed to provide additional notice to, and solicit votes from, what ITCAN calls "exposed yet unimpaired creditors."
I. Flintkote cannot show that it is likely to be subject to "substantial future demands" as required by § 524(g)(2)(B)(ii).
ITCAN's § 524(g)(2)(B)(ii) objection stems from the decision in Grossman's, which held that "a `claim' arises when an individual is exposed pre-petition to a product or other conduct giving rise to an injury, which underlies a `right to payment' under the Bankruptcy Code." Grossman's, 607 F.3d at 125.
Before we turn to the statutory text, we note that this argument was rejected by this Court in our recent decision in In re W.R. Grace, where we held that "future demand holders are those who have been exposed to asbestos but whose disease or other injury, sufficient to prove damages, has not yet manifested."
"A court's primary purpose in statutory interpretation is to discern legislative intent." Morgan v. Gay, 466 F.3d 276, 277 (3d Cir. 2006). "The plain meaning of the text should be conclusive, except in the rare instance when the court determines that the plain meaning is ambiguous," Lawrence v. City of Philadelphia, Pa., 527 F.3d 299, 317 (3d Cir. 2008), or where "the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters." United States v. Ron Pair Enterprises., Inc., 489 U.S. 235, 242 (1989). In the latter situation, "the intention of the drafters, rather than the strict language, controls." Id. Furthermore, "statutory language cannot be construed in a vacuum. It is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme." Davis v. Mich. Dept. of Treasury, 489 U.S. 803, 809 (1989).
With respect to § 524(g)(5), we find the statute to be ambiguous and that its literal application produces a result that cannot be reconciled with the intent of its drafters. The statute states that "[i]n this subsection, the term `demand' is a "demand for payment, present or future that — (A) was not a claim during the proceedings leading to the confirmation of a plan of reorganization." Section 524(g)(5)(A). The term "claim" is not qualified in any way, so presumably "claim" is intended to be governed by its definition in § 101(5), which provides:
Furthermore, as ITCAN contends, it appears from a literal reading of § 524(g)(5) that the terms "claim" and "demand" are meant to be mutually exclusive. However, the definition of "demand" in § 524(g)(5) describes a "present or future" demand for payment, and given the expansive definition of "claim" in § 101(5), the Court cannot fathom a situation where an individual could hold a "present" demand for payment that is not technically a "claim" under § 101(5). Thus, if construed as ITCAN suggests, the qualifier, "present or future [demand]," in § 524(g)(5) is superfluous, and "[i]t is a well known canon of statutory construction that courts should construe statutory language to avoid interpretations that would render any phrase superfluous." United States v. Cooper, 396 F.3d 308, 312 (3d Cir. 2005).
ITCAN's literal interpretation of § 524(g)(5) produces a "result demonstrably at odds with the intentions of its drafters." Ron Pair, 489 U.S. at 242. In part because of long latency periods of certain asbestos-related illnesses, Congress enacted § 524(g) to protect the due process rights of the exposed yet unimpaired. The purpose of § 524(g) is to provide those whose illnesses manifest post-petition, regardless of pre- or post-petition exposure, with a fund for recovery equivalent to what currently ill claimants will be paid. Section 524(g) thus removes the risk that the size of payment in compensation for injuries will depend on how quickly a victim gets sick or manifests an injury. It is impossible to include all individuals who are asymptomatic in the "known, exposed" category because those individuals, themselves, do not know that they may become ill and thus, hold a right to payment, contingent on manifesting an illness.
Because asbestos production in this country largely ceased many decades ago, the number of individuals who will face first-time, post-petition or post-confirmation exposure will be negligible for almost every debtor facing asbestos liability. Under ITCAN's interpretation of § 524(g)(5), the result of that fact is that no debtor would qualify for protection under § 524(g). No § 524(g) injunctions could ever issue because the requirement that the "actual amounts, numbers, and timing of such future demands cannot be determined" could never be met. Instead, knowing that all those who manifest injury in the future were nonetheless exposed pre-confirmation and thus have claims under § 101(5), the court would likely always be in a position of finding that there would be no future demands that were not "claim[s] during the proceedings leading to the confirmation of a plan of reorganization." See § 524(g)(5)(A).
Moreover, because ITCAN's interpretation of § 524(g)(5) frustrates the statute's purpose of protecting the due process rights of exposed yet unimpaired creditors, ITCAN's interpretation runs contrary to the Bankruptcy Code as a whole, which strives to treat similarly situated creditors equitably. Thus, we find, as we did in W.R. Grace, that for purposes of § 524(g), "future demand holders are those who have been exposed to asbestos but whose disease or other injury, sufficient to prove damages, has not yet manifested." In re W.R. Grace, 446 B.R. 96, 130 n. 58 (Bankr. D. Del. 2011).
Further complicating matters is the fact that courts, including this Court, have inartfully used the words "claim" and "demand" interchangeably in the § 524(g) context. This has added to the confusion arising from the apparent conflict between the definition of "demand" in § 524(g) and the definition of "claim" in § 101(5). For instance, in Combustion Engineering, the Court of Appeals described the requirement of § 524(g) that a debtor must be likely to be subject to "substantial future demands" as follows:
Combustion Engineering, 391 F.3d at 234 n.45 (emphasis added).
Indeed, Grossman's itself, while not a § 524(g) case, nevertheless endorsed the above language from Combustion Engineering by quoting it in articulating the requirements of § 524(g).
Ultimately, what Congress was attempting to do with § 524(g) was to ensure that everyone unfortunate enough to contract asbestos-related illnesses as a result of exposure to a bankruptcy debtor's products, thereby becoming entitled to compensation from that debtor, be subject to substantially the same treatment in bankruptcy. § 524(g)(2)(B)(ii)(V). Thus, Congress decided that whether one is currently a victim of such an illness or whether one will not fall ill for many more years, for bankruptcy-related purposes, a victim's compensation should not depend on how quickly he or she manifests illness. Section 524(g) channels all claims of this nature, present or future, to an asbestos personal injury trust. To that end, we are proceeding in this case in the same manner as we have in all other § 524(g) cases that have come before this Court, and as all courts that have confirmed § 524(g) plans across the country have proceeded.
Thus, notwithstanding any inartful language in § 524(g)(5), it is clear to this Court that the intent of § 524(g)(2)(B)(ii) is simply that, to qualify for a § 524(g) channeling injunction, there must be, among other things, a likelihood that a substantial number of people, who are not yet able to prove damages from an asbestos-related disease, will eventually demand payment from the debtor as compensation for asbestos-related illnesses contracted through exposure to the debtor's products. Whether referred to as "future demand holders" or "future claimants," the bottom line is that without a channeling injunction in place and an FCR appointed to protect their interests, by the time their injuries manifest there will be a high probability that the debtor will lack funds to provide them with just compensation. ITCAN's interpretation of the requirements of § 524(g) would all but ensure that most if not all people holding future demands would receive no compensation for their injuries, because, with asbestos production largely ending decades ago, it is nearly impossible for an asbestos debtor to demonstrate that a substantial number of people have been exposed to the debtor's asbestos products subsequent to the confirmation of their plan of reorganization.
Having rejected ITCAN's narrow interpretation of "demand" in the context of § 524(g), the Court finds that, based on the long latency periods of asbestos-related diseases and the substantial number of asbestos personal injury claims lodged against Flintkote pre-petition, along with the substantial number of such claims that remained unresolved as of the petition date,
Based on its interpretation of Grossman's, ITCAN objects that Flintkote did not adequately provide notice and solicit votes from the "exposed but unimpaired creditors" as required under 11 U.S.C. §§ 342(a), 1125, and 1126.
II. Flintkote cannot qualify for protection under § 524(g) because it does not
operate a "viable, going concern business." 78
The heart of ITCAN's confirmation objections centers on Flintkote's planned post-confirmation business activity, which implicates a number of issues: whether there is an "ongoing business" requirement implicit in § 524(g); if there is an "ongoing business" requirement, what level of business activity is sufficient to satisfy it; and whether Flintkote's real estate business is profitable so that Reorganized Flintkote: (i) will be able to make "future payments, including dividends" to the Trust pursuant to § 524(g)(2)(B)(i)(II); and (ii) will satisfy the standard of no "need for further financial reorganization" or liquidation following confirmation of its Plan.
A. The "ongoing business" requirement
There are several indications that § 524(g) requires the debtor to engage in business post-confirmation. First, § 524(g)(1)(A) states that a bankruptcy court may issue a channeling injunction "to supplement the injunctive effect of a discharge under this section." It follows then that there must be a discharge for the channeling injunction to "supplement." Whether a corporate debtor receives a discharge is governed by § 1141(d), which states, as relevant here, that a debtor will not receive a discharge upon confirmation if "the debtor does not engage in business after consummation of the plan" and "the debtor would be denied a discharge under section 727(a) of this title if the case were a case under chapter 7 of this title."
The Court of Appeals in Combustion Engineering stated, in dicta, that the "implication of [§ 524(g)(2)(B)(i)(II)] is that the reorganized debtor must be a going concern, such that it is able to make future payments into the trust to provide an `evergreen' funding source for future asbestos claimants." Combustion Engineering, 391 F.3d at 248. In Combustion Engineering, the debtor's business activity consisted of owning and leasing an environmentally contaminated piece of land. Id. The debtor was in a cash neutral position, with no products and services and no employees. Id. The Court of Appeals described this business activity as "at most, minimal," and opined that it was "debatable" whether or not such activity could satisfy § 524(g)(2)(B)(i)(II), but noted that no party with standing had raised the issue. Id. On remand, this Court held that Combustion Engineering's business activity was sufficient for obtaining a discharge under § 1141(d) and that the funding requirements of § 524(g)(2)(B)(i)(II) were satisfied, which was affirmed by the District Court. In re Combustion Engineering, Inc., 2005 Bankr. LEXIS 2623, *54-*57 (Bankr. D. Del. Dec. 19, 2005).
The Plan Proponents argue that § 524(g) contains no "ongoing business requirement," and even if it does, Flintkote's business activities are more than sufficient to satisfy any such requirement. The Plan Proponents cite to In re Quigley Co., 437 B.R. 102, 141 (Bankr. S.D.N.Y. 2010), as an example of a court declining to impose an "ongoing business" requirement through § 524(g). In the Quigley court's view, § 524(g)(2)(B)(i)(II) "implies an ability to make payments into the future — an `evergreen' source of funding — and this is what the Third Circuit in Combustion Engineering undoubtedly meant when it referred to an `ongoing business' requirement." Quigley, 437 B.R. at 141. The court recognized that "the more difficult questions surround the provision's silence regarding the amount and duration of the funding obligation. . . . [A]sbestos trusts can last for forty years. . . . A debtor would be hard-pressed to produce credible forty-year income projections. Id. The court reasoned that imposing an "ongoing business requirement" onto § 524(g) "could transform the funding requirement into a feasibility test, duplicating the requirement imposed under 11 U.S.C. § 1129(a)(11)." Id. Combustion Engineering itself contains language suggesting that while § 524(g)(2)(B)(i)(II) may imply that the debtor must be a "going concern" in order to meet its funding requirements, in certain situations the funding requirements may be met in other ways.
Combustion Engineering, 391 F.3d at 248 n.70 ("From the claimants' perspective, it may make little economic difference whether the source of future funds comes from the debtor or a third-party, so long as a sufficient and reliable pool of assets remains available to pay their claims."). Nevertheless, we will assume without deciding that § 524(g)(2)(B)(i)(II) contains an "ongoing business" requirement. The question then remains as to the extent of business activity that will satisfy such a requirement.
B. Only debtors continuing viable, pre-petition businesses can qualify for § 524(g)
ITCAN contends that the requirements of § 524(g)(2)(B)(i)(II) can only be satisfied by a debtor continuing a viable, pre-petition business post-confirmation, because § 524(g) was intended only to protect otherwise successful companies from the threat of crippling asbestos liability. In support of its position, ITCAN relies heavily on the legislative history behind § 524(g), and particularly the following statement made during the congressional debates describing the proposed amendment of § 524 to add subsection (g):
ITCAN argues that in this case, there is no "goose that lays the golden egg" worth saving because Flintkote is not continuing its pre-petition business, and it is improper, and against the spirit of § 524(g), for Flintkote to establish new business lines while in bankruptcy to satisfy § 524(g). As will be explained further below, we disagree. Nothing in § 524(g), § 1129, § 1141, or Combustion Engineering requires a debtor to continue to engage in a pre-petition (and possibly unsuccessful) business to the exclusion of any other.
As noted supra, the language of the statute is the starting point for any exercise in statutory construction. Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 438 (1999). "[W]here the statute's language is plain, `the sole function of the courts is to enforce it according to its terms.'" Ron Pair, 489 U.S. at 241 (quoting Caminetti v. United States, 242 U.S. 470, 485 (1917)). Nothing in § 524(g) plainly and unambiguously requires a debtor to continue in a pre-petition business, let alone a viable pre-petition business. Section 524(g)(2)(B)(i)(II) requires that the trust be funded "in whole or in part by the securities of 1 or more debtors" and that the debtor "make future payments, including dividends" to the trust, but it does not specify the manner in which this must be accomplished. In this case, all the stock of Reorganized Flintkote will be transferred to the Trust. Thus, the Debtor's securities are being used to fund the Trust and any dividends declared will be paid to the Trust.
Moreover, § 524(g)(2)(B) includes several other express requirements to qualify for a § 524(g) injunction. To name a few, the trust must assume the liabilities of a debtor "which at the time of entry of the order for relief has been named as a defendant in personal injury, wrongful death, or property-damage actions seeking recovery for damages allegedly caused by the presence of, or exposure to, asbestos or asbestos-containing products;"
In light of the many express requirements laid out in § 524(g), the Court finds that had Congress intended § 524(g) to require a debtor to operate a viable, ongoing, pre-petition business, it would have included statutory language to that effect in § 524(g)(2)(B). However, such a specification is plainly absent, and thus the Court should not consider legislative history or statutory purpose in the face of unambiguous statutory language. Alli v. Decker, 650 F.3d 1007, 1011 (3d Cir. 2011). Even if the Court were to give weight to the legislative history behind § 524(g), the history does not contain this requirement. The House Committee Report discussing § 524(g) states that "[t]he asbestos trust/injunction mechanism established in the bill is available for use by any asbestos company facing a similarly overwhelming liability. House Report 103-835, Section 111, at 41 (emphasis added); In re Plant Insulation Co., 469 B.R. 843, 864 (Bankr. N.D. Cal. 2012).
ITCAN cites two cases in support of its argument that a debtor must be continuing a pre-petition business in order to qualify for protection under § 524(g): Grausz v. Sampson (In re Grausz), 63 Fed. Appx. 647 (4th Cir. 2003) ("Grausz"), and In re S. Canaan Cellular Invs., 427 B.R. 44 (Bankr. E.D. Pa. 2010) ("S. Canaan Cellular"). Grausz is an unpublished case involving an individual Chapter 11 debtor whose plan called for the liquidation of his pre-petition businesses. Grausz, 63 Fed. Appx. at 650. The debtor argued that because, post-consummation, he would be working as a consultant for an entity unrelated to the bankruptcy, he was engaged in business sufficient to satisfy § 1141(d) and receive a discharge. Id. The Court of Appeals noted that the business Dr. Grausz worked for post-consummation was unrelated to the entities in bankruptcy, and that § 1141(d)(3)(B) "does not refer to basic employment by an individual debtor but to the continuation of a pre-petition business." Id. Thus, Dr. Grausz's pre-petition business was liquidating; there was no ongoing business at all. Instead, Dr. Grausz simply became an employee for an entirely unrelated entity. The circumstances here are clearly inapposite, as Flintkote is: (1) not an individual debtor, (2) not liquidating, and (3) continuing to engage in business post-confirmation.
S. Canaan Cellular applied Grausz's holding to corporate debtors. However, in S. Canaan Cellular, there was a strong possibility that the debtors' partnership interests in their pre-petition businesses would be liquidated pursuant to their joint plan. Were those interests sold, "the debtors would not be engaging in their prepetition business, which was to act as general and limited partners of SCCCC, LP" and thus the debtors would not be "entitled to receive a bankruptcy discharge" inasmuch as "a corporate or partnership debtor that is both liquidating and discontinuing its business does not receive a discharge when its plan is confirmed." S. Canaan Cellular, 427 B.R. at 84-85 (citation omitted).
Neither Grausz nor S. Canaan Cellular control. Neither case can be said to impose a requirement in § 524(g) that a reorganized debtor forever engage in a particular pre-petition business, as § 524(g) is not implicated in either case. The business activity in those two cases is analyzed under the § 1141(d) standard. Even applying the § 1141(d) standard here, the cases are not on point. Unlike those debtors, Flintkote is not liquidating its business; it is reorganizing its business to pursue other ventures. Further, there is no requirement under § 1141(d) that a debtor continue the same business lines and activities as it engaged in pre-petition. The requirement under the statute, in order to receive a discharge, is simply to "engage in business after consummation of the plan." § 1141(d)(3)(B)."
While preserving the going concern value of a viable business may be one of the means to achieve the goals of § 524(g), the point of engaging in business is to provide an evergreen source of funds for the trust. This will ensure that in the face of long latency periods for asbestos-related illnesses, all claimants, current and future, receive just and comparable compensation for their injuries, which is a primary purpose of § 524(g). The language of § 524(g)(2)(B)(i)(II) states only that the debtor is obligated to make "future payments, including dividends" to the trust, and in our view it is the ability of the debtor to do so that is relevant.
The Court finds that Flintkote's business activity is sufficient to satisfy any "ongoing business" requirement that may be imposed by § 524(g). As will be explained in greater detail in the next section, Flintkote now owns and leases real estate, and currently manages six properties,
Flintkote is also currently under agreement to provide consulting and executive management services to Plant. The contract with Plant has been renegotiated and approved by the bankruptcy court in In re Plant Insulation Co. (the "Amended Plant Agreement").
Assuming § 524(g)(2)(B)(i)(II) requires a "going concern," the Court finds that Flintkote's real estate business and its consulting and executive management services business satisfy that requirement. Having met the "ongoing business" or "going concern" requirement of § 524(g) by virtue of its real estate and consulting and executive management services businesses, the Court expresses no opinion on whether two of Flintkote's three other purported business lines, claims processing and trust services, constitute "businesses" sufficient to satisfy an "ongoing business" or "going concern" requirement for purposes of § 524(g). That said, we note that we do not consider Flintkote's effort in simply pursuing or managing a lawsuit (i.e., the DRL) in pursuit of an asset to be a going concern business.
Furthermore, having found that Flintkote will "engage in business after consummation of the plan" sufficient to be entitled to discharge under § 1141(d), the Court assumes without deciding and need not determine whether Flintkote is liquidating "substantially all of the property of the estate." See § 1141(d)(3)(A).
Although the Court finds that Flintkote will be engaged in business sufficient to satisfy any "ongoing business" requirement of § 524(g) and the requirements for discharge in § 1141(d)(3), the Court must still be assured that Flintkote will be able to meet the express funding requirements of § 524(g)(2)(B)(i)(II). To that end, the Court reopened the record on January 7, 2011, to allow the Plan Proponents and ITCAN to introduce evidence as to the profitability of Flintkote's real estate business.
Upon ITCAN's oral motion at the confirmation hearing on October 25, 2010, to deny confirmation as a matter of law based on a failure of Flintkote to satisfy its burden of proof as to the profitability
After a period of discovery, the confirmation hearing continued on September 12, 13, and 19, 2011. The Court heard extensive testimony from several witnesses regarding the performance and projection of profitability of Flintkote's real estate business. The Plan Proponents presented as fact witnesses the Debtors' CEO and President, David Gordon, and Donald F. Oliver, the Debtors' Controller. Flintkote also presented Daniel T. Gary, a Certified Public Accountant ("CPA") with KPMG LLP, to provide expert testimony in support of confirmation. ITCAN presented expert witnesses Craig P. Casey, a CPA with Grant Thornton LLP, and Boris Onefater, a CPA with Constellation Investment Corporation. The parties introduced numerous documentary exhibits, affidavits, and various other evidence.
The Plan Proponents' Evidence
In January 2011, the Debtors submitted the P&L and the pro formas (together, the "Schedules") to demonstrate the profitability of the real estate business. The substance of the schedules is summarized by the following chart:
At the direction of Mr. Gary, Flintkote utilized segment accounting under ASC-280
In accordance with ASC-280, Flintkote presented its real estate business earnings before income taxes, non-recurring costs, and reorganization-related expenses. Mr. Gary testified that excluding income taxes from the profitability presentation was reasonable because: (1) including income taxes is not a common practice in segment accounting, (2) Flintkote had no income taxes to allocate because it did not pay income tax for any of the years comprising the historical period, 2008-2010, (3) without historical income taxes any allocation of future income taxes would be hypothetical and speculative, creating more inaccuracy and uncertainty in the schedules.
With respect to non-recurring, start-up costs, Mr. Gary testified that, for accounting purposes, those expenses must be recognized immediately rather than amortized over time.
Similarly, we agree with Mr. Gary that reorganization-related costs, such as legal fees incurred in connection with motions to purchase real estate, should not be included in the presentation of future real estate business earnings. Post-confirmation, Flintkote will not be required to incur these expenses, and therefore their exclusion from the presentation of earnings creates a more accurate picture of what the true expenses of the business will be going forward.
The significant recurring costs for the real estate business are compensation, travel, and administrative costs such as rent, directors and officers' insurance ("D&O insurance"), and the costs of support staff. As for the compensation and administrative costs, Flintkote allocated them by dividing the number of workdays Mr. Gordon spent conducting real estate business by the number of total available workdays.
The other significant recurring cost is Mr. Gordon's travel expense. Local travel expenses, such as lodging, meals, and rental cars, were specifically identified by reviewing Mr. Gordon's credit card bills and other receipts, then allocated in proportion to the amount of real estate business conducted on that particular trip.
Based on the evidence presented by the Plan Proponents, the bottom line for Flintkote is that, assuming it is able to acquire seven additional properties, Flintkote's real estate business will generate rental income in excess of $1.3 million in the third year, post-effective date. Flintkote will earn $1.071 million in both annual EBIT and annual EBITN in the third year, post-effective date and beyond, as none of Flintkote's triple-net leases expire before 2023.
ITCAN's Objections Regarding Profitability
ITCAN objects that the Plan is not feasible under § 1129(a)(11), and does not qualify under the going concern requirement of Section 524(g) because Flintkote's businesses, when viewed as a whole, show that Flintkote is not a profitable company. ITCAN also maintains that even when the real estate business is considered alone, that segment of Flintkote's business is not currently and will never be profitable, and thus the Plan remains infeasible.
Section 1129(a)(11) states that a plan can be confirmed, inter alia, when confirmation "is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor . . . ." § 1129(a)(11). The debtor must prove the feasibility of its plan by a preponderance of the evidence. In re W.R. Grace & Co., 475 B.R. 34, 114 (D. Del. 2012). The bankruptcy court must make a specific finding that the plan is feasible, and, in doing so, it "need not require a guarantee of success, but rather only must find that `the plan present[s] a workable scheme of organization and operation from which there may be reasonable expectation of success.'" Id. (quoting Corestates Bank, N.A. v. United Chem. Techs. Inc., 202 B.R. 33, 45 (E.D. Pa. 1996)). Factors to be considered by the bankruptcy court in making a finding of feasibility include "assessment of the debtor's capital structure, the earning power of the business, economic conditions, and the ability of the corporation's management." Id. at 115. "Most importantly, the debtor must provide the bankruptcy court with an estimate of its future earning capacity." Id.
ITCAN objects that Flintkote did not provide any evidence of profitability as to any of its business lines other than the real estate business, and that if all of Flintkote's businesses are considered, the company as a whole is not profitable. ITCAN maintains that "to understand and assess the viability of Flintkote, a reasonably prudent investor would want to understand
Flintkote argues that it is misleading to compare company-wide expenses to revenue solely from the real estate business, because a large portion of that $16 million in expenses has produced over $175 million in insurance recoveries during the same three year period.
Moreover, in reopening the record, the Court did not require Flintkote to provide financial information on every aspect of its company. Rather, the record was reopened on January 7, 2011, "for the limited purpose of allowing (a) the Plan Proponents to introduce evidence relating to the profitability or loss of the Debtors' real property management business." See Order Reopening Record on Confirmation and Setting Deadlines Related Thereto, Doc. No. 5602. We limited the reopening of the record to the real estate business because, at the time, the Court viewed this as Flintkote's only business line that could satisfy an "ongoing business" requirement within § 524(g)(2)(B)(i)(II).
ITCAN next argues that the Plan is not feasible because Flintkote relies too heavily on the Trust for the funding of its businesses. Under the Trust Services Agreement, the Trust is obligated to pay "Reorganized Flintkote's expenditures relating to its performance of the Flintkote Services (including the allocable portion of Flintkote's general overhead attributable to the Flintkote Services compared to Flintkote's other business activities)" for an initial period of eighteen months, subject to automatic renewal.
In In re Quigley Co., 437 B.R. 102 (Bankr. S.D.N.Y. 2010), the court held that the debtor failed to prove its plan was feasible due to insufficient business prospects post-confirmation. Quigley, 437 B.R. at 143. Quigley's only business was providing claims processing services, which Quigley performed for its parent company, Pfizer, under a five year agreement. Id., at 121-22. The plan also provided that Quigley would perform claims processing services for the post-confirmation trust. Id. The court credited testimony at trial indicating that it was unlikely that Quigley would be able to attract any new clients for its claims processing business and thus, once its contract with Pfizer terminated, it would have insufficient business to continue operating. Id., at 142-43. ITCAN argues that the instant case is very similar to Quigley, because Flintkote's businesses are "merely services to be provided to a post-confirmation trust pursuant to a time-delimited contract."
As the Plan Proponents point out, however, there are crucial differences between Quigley's post-confirmation business and that of Flintkote. The most obvious difference is that Flintkote has substantially more business operations and opportunities than Quigley, which only performed claims processing services. Quigley, 437 B.R. at 121-22. Flintkote will perform claims processing and trust services for the Trust. Flintkote operates its consulting and executive management services business, and currently performs such services for a third party, Plant. Flintkote also operates its real estate business, which currently consists of owning six properties
ITCAN contends that if the Trust were to terminate the Trust Services Agreement, and Flintkote were forced to cover its own administrative costs and overhead, Flintkote could never be profitable. However, the Court finds there is no evidence to suggest that the Trust will terminate the Trust Services Agreement. The Court credits the testimony of Mr. McMonagle, the FCR, that Flintkote's employees are experienced in processing claims and performing various other administrative functions and as such the employees will provide valuable services to the Trust.
The P&L and Pro Forma Schedules
As to the real estate business itself, ITCAN disputes Flintkote's presentation of profitability, arguing that the historical P&L is flawed which renders the pro forma projections flawed and inaccurate.
ITCAN contends first that Flintkote's presentation of profitability does not comport with any recognized financial methodology. ITCAN's expert, Craig P. Casey, testified that in his opinion, Mr. Gary selectively applied portions of ASC-280 and SAB Topic 1-B in order to show that the real estate business makes a profit.
Next, ITCAN contends that even when only the real estate business is considered, Flintkote severely understated or omitted real estate-related expenses attributable to that segment of its business in an effort to show a profit. Mr. Casey calculated that the minimum quantifiable amount of these errors and omissions for the historical period is $484,000, which when compared to Flintkote's reported net profit in that period of roughly $86,000, makes Flintkote unprofitable during the historical period.
ITCAN also objects to Flintkote's omission of federal income taxes from its presentation of earnings. Mr. Casey contends that $34,000 in income tax expenses should have been allocated to the real estate business over the historical period.
Next, ITCAN contends that Flintkote understated Mr. Gordon's time (and thus, his compensation) spent working on real estate matters in order to allocate a smaller portion of his salary to the real estate business. The Plan Proponents concede that Mr. Gordon's time is the primary driver of expenses for the real estate business. As noted above, Flintkote allocated 8.3% of Mr. Gordon's compensation to the real estate business based on Mr. Gordon's estimation that he utilized 56 work days for it during the historical period. ITCAN contends that Mr. Gordon had no basis for making any allocation and in fact spent much more time than he allotted. As evidence ITCAN points to Mr. Gordon's testimony in 2010, during which he stated that "I don't keep track of time. I know that I spent a significant amount of time developing the portfolio that exists today."
The court finds that Flintkote reasonably allocated Mr. Gordon's time. Because it was impossible, as Mr. Gordon testified, to account for every moment Mr. Gordon spent on real estate matters while traveling, Flintkote established a minimum one-half day increment for allocation purposes. The one-half day increment was specifically chosen to over-allocate Mr. Gordon's time to real estate business on days in which he might have a single, hour-long meeting related to real estate.
Even if the allocation of Mr. Gordon's compensation to real estate is understated to some degree, which, assuming arguendo is the case, the Court finds that given that Flintkote's projected earnings from Year 3 of the pro forma period and beyond exceed $1 million, Mr. Casey's adjustments do not substantially alter the picture of profitability for Flintkote.
ITCAN also objects that Mr. Gordon's travel expenses incurred in connection with the real estate business have been materially understated by Flintkote. ITCAN suggests that Flintkote made over 259 errors related to omitted or under-allocated travel expenses, including omitting altogether four specific trips during which real estate business was conducted. Mr. Casey opined that the "minimum quantifiable impact" of these errors and omissions total close to $25,000 over the historical period and approximately $43,000 over the pro forma period.
Based on the evidence presented, the Court finds that the Plan is feasible under § 1129(a)(11). Flintkote's Plan is far from "visionary or speculative." In re Aleris Intern., Inc., 2010 Bankr. LEXIS 2997, at *86 (Bankr. D. Del. 2010). Rather, the Court finds that Flintkote will be able to meet its primary obligations under the Plan after confirmation. The § 524(g) Trust will be able to operate upon the effective date, as the Trust Agreement, the TDPs, and the Trust Services Agreement are included as exhibits to the Plan and will go into effect upon the effective date.
In the short term, Flintkote is obligated to pay approximately $200,000 in allowed general unsecured claims. See Confirmation Ex. 74. Flintkote is also reserving $5.5 million from the $37.6 million in cash it will retain to pay costs such as professional fees, reorganization bonuses, environmental settlements, and deferred retention payments. Id. Another $6 million will be reserved for any potential environmental liability that may remain unresolved upon the effective date. Id. The $37.6 million retained by Flintkote will be more than sufficient to cover these short-term Plan obligations.
With respect to long term obligations under the Plan, Flintkote must perform under the Trust Services Agreement and its employment contracts. We find that it will be able to do so. There is no evidence that the Trust will terminate the Trust Services Agreement. We credit the testimony of the FCR that there is no reason that the Trust would not continue to use Flintkote for its claims processing as long as it performed well.
The Trust is also obligated to fund the DRL, for which it will receive 98% of any net recovery. Furthermore, Flintkote has established that its real estate business will produce a steady stream of income post-confirmation. Thus, the Court finds that Plan confirmation is "not likely to be followed by the liquidation, or the need for further financial reorganization" of Flintkote. § 1129(a)(11).
ITCAN has attempted to show that Flintkote's picture of historical profitability is less than accurate and, as a result, Flintkote's future projections based on the same historical data must necessarily be inaccurate as well. The Court agrees that errors were made and that Flintkote's historical data, upon which it makes its projections, are not 100% accurate. However, these inaccuracies are not dispositive of the issue of the probability of Flintkote's future success or likelihood of the need for further reorganization or liquidation. Flintkote is not required to definitively prove that its newly initiated real estate business has been profitable in the past. Historical profitability is certainly relevant to whether there can be a "reasonable expectation of success" from a "workable scheme of organization,"
All objections not addressed herein having been previously resolved, and the Court finding no merit to those addressed herein, the Court will confirm the Plan, issue the § 524(g) injunction, and recommend that the District Court affirm the confirmation of the Plan and the § 524(g) injunction. Additional uncontested Findings of Fact and Conclusions of Law and an Order Confirming the Amended Joint Plan of Reorganization will be separately issued.