Chateaugay Corp., In re
| Decision Date | 29 November 1993 |
| Docket Number | 2059,Nos. 2058,2061,FRITO-LA,INC,s. 2058 |
| Parties | , 24 Bankr.Ct.Dec. 1625, Bankr. L. Rep. P 75,617 In re CHATEAUGAY CORPORATION, Reomar, Inc., LTV Corporation, LTV Steel Company, Inc., LTV Steel Tubular Products Company, Debtors., FL Holding, Inc., Ainwick Corporation, and Aetna Casualty and Surety Company, Plaintiffs-Appellants, v. LTV STEEL CO., INC., Chateaugay Corporation, Reomar, Inc., LTV Corporation, Kentron Saudi Arabia, Inc., LSC Leasing, Inc., The LTV Corporation (Wyoming), LTV International, N.V., LTV Sales Finance Company, LTVUS Corp., Repsteel Overseas Finance N.V., LTV Educational Systems, Inc., BCNR Mining Corporation, Bardale Coal Company, Barrel Corporation of West Virginia, Crystalane, Inc., Crystalee Coal Co., Dearborn Leasing Co., Erie B. Corporation, Erie Development Co., Erie I Corporation, LTV Steel Mining Co., (formerly Erie Mining Company), Georgia Tubing Corporation, Gulf States Steel Corporation, J.W. Storage Company of Ohio, Jalcite I, Inc., Jalcite II, Inc., Jarole Mining Company, Ltd., Jones & Laughlin Environmental Properties, Inc., Jones & Laughlin Mining Company, Ltd., Jones & Laughlin Ore Mining Company, LTV Electro-Galvanizing, Inc., LTV Holdings, Inc., LTV Leasing, Inc., LTV Steel Tubular Products Company, Lorain Pellet Terminal Co., Lykes Equipment Corporation, Lykes Leasing Corporation, Nemacolin Mines Corporation, Republic Buildings Corporation, Republic Drainage Products Company, Republic Technology Corporation, Republic-Reserve, Inc., Tuscaloosa Energy Corporation, YST Erie Corporation, Youngstown Erie Corporation, LTV Aerospace and Defense Company, National Telephone Systems, Inc., Sierra Information Systems Corporation, Sierra Research International Corporation, Universal Time/Frequency, Inc., LTV Industries, Inc., LTV Multinational, Inc., Vought Overseas, Ltd., LTV Vehicle Corp., Amland Corporation, Vought Properties, Inc., LTV Energy Products Company, Continental EMSCO Company, FC Divestiture Corporation, Halcorp, Inc., J.K. Industries, Inc., Juddcorp, Inc., LTV Properti |
| Court | U.S. Court of Appeals — Second Circuit |
Michael J. Crames, Guy Miller Struve, New York City (Edmund M. Emrich, Arlene R. Alves, Lisa Martinez Wolmart, John C. Amabile, Robin L. Golomb, Kaye, Scholer, Fierman, Hays & Handler, Karen E. Wagner, Bradley J. Butwin, Linda A. Ginsberg, Davis, Polk & Wardwell, M. William Munno, Seward & Kissel, of counsel), for debtors-appellees and appellees.
Arthur S. Friedman, New York City (Friedman, Wang & Bleiberg, Martin I. Shelton, Shea & Gould, on the brief, Laurie R. Josephs, Charles R. Macedo, Christine P. Chudnovsky, of counsel), for plaintiffs-appellants Frito-Lay, Inc., FL Holding Inc. and Ainwick Corp.
Larry L. Simms, Washington, DC (Harold S. Horwich, Lorraine M. Weil, G. Eric Brunstad Before MAHONEY, McLAUGHLIN and JACOBS, Circuit Judges.
Jr., Hebb & Gitlin, Hartford, Ct., on the brief, James P. Ricciardi, Gregory E. Barton, Gibson, Dunn & Crutcher, of counsel), for plaintiff-appellant, Aetna Cas. and Sur. Co.
On May 27, 1993, the United States Bankruptcy Court for the Southern District of New York, Burton R. Lifland, Chief Judge, entered an Order confirming the Second Modified Joint Plan of Reorganization (the "Plan") in the bankruptcy proceedings of appellee LTV Corporation and its affiliated debtors (individually and collectively, "LTV" or the "Debtors"). The Plan was substantially consummated on June 28, 1993 or immediately thereafter. In this consolidated appeal, Frito-Lay, Inc., FL Holding, Inc. and Ainwick Corporation (collectively "Frito-Lay") primarily contest the confirmation of a plan that does not afford their claims administrative priority; and both Frito-Lay and Aetna Casualty & Surety Company ("Aetna") contest LTV's failure to establish a full reserve for their disputed priority claims, pending appeal of the Plan's confirmation, so that Frito-Lay's and Aetna's rights would not be prejudiced or mooted by the substantial consummation of the Plan.
(A) Frito-Lay and LTV were parties to a series of prepetition contracts known as "safe-harbor" leases--a kind of tax transaction encouraged by the federal tax laws for a brief period in the early 1980s. In the transactions giving rise to Frito-Lay's appeal, Frito-Lay nominally purchased tens of millions of dollars in depreciable assets used by LTV in its business, and at the same time nominally leased the assets back to LTV, paying the purchase price of the assets in accounting-entry installments that netted out as a wash against what LTV undertook to pay on the leasebacks. Frito-Lay also paid LTV substantial sums at the outset--the only part of the transaction in which value actually changed hands. In this way, Frito-Lay purchased tax benefits that LTV, as an unprofitable company, could not use.
After filing for bankruptcy protection, debtor-in-possession LTV retired many of the assets subject to the Frito-Lay leases. Under governing tax law, those retirements reduced the federal tax liability of the bankrupt estate and triggered adverse federal tax consequences for Frito-Lay. It is expected that the same consequences will ensue from likely future dispositions of some or all of the remaining assets. LTV has an undisputed obligation to indemnify Frito-Lay for the adverse tax consequences triggered by the disposition of assets subject to the leases. At each stage of these proceedings, however, Frito-Lay has contended that its indemnity claims for asset dispositions by the debtors-in-possession should be afforded administrative priority under the Plan, and that Frito-Lay's rights to indemnification for prospective, post-bankruptcy asset dispositions similarly should not be impaired.
Frito-Lay appeals from two orders of the United States District Court for the Southern District of New York. The first order, dated June 9, 1993, John E. Sprizzo, Judge, affirmed three orders of the United States Bankruptcy Court for the Southern District of New York, Burton R. Lifland, Chief Judge, entered July 31, 1989, February 18, 1992 and July 2, 1992, which, inter alia, authorized Frito-Lay's claims against LTV as pre-petition, general unsecured claims in the aggregate amount of $39,625,284. The second order, dated June 21, 1993, Michael B. Mukasey, Judge, affirmed two orders of the United States Bankruptcy Court for the Southern District of New York, Burton R. Lifland, Chief Judge, entered May 27, 1993 and June 7, 1993. To the extent relevant to this appeal, those orders: ruled that indemnification claims arising under Frito-Lay's unsecured safe-harbor leases must be treated as impaired; treated as unimpaired similar indemnification claims that were secured by guaranties under certain safe-harbor leases to which Frito-Lay was not a party; denied Frito-Lay's motion to compel LTV to reserve fully for Frito-Lay's asserted administrative priority claims pending appeal; and determined that the Debtors' reorganization plan could be confirmed while treating as unimpaired Inland Steel Company's contingent (B) Aetna Casualty & Surety Company ("Aetna") issued approximately 262 surety bonds in pre-petition transactions to secure LTV's payment of workers' compensation claims to certain LTV employees, and later paid tens of millions of dollars under the bonds after LTV entered bankruptcy and defaulted on the underlying compensation claims. Aetna has been awarded fractional recovery as an unsecured creditor, having unsuccessfully argued before the bankruptcy court that the Plan impermissibly discriminates between (a) the workers' compensation claims that Aetna submitted as subrogee under the surety bonds and (b) the workers' compensation claims--paid as unimpaired under the Plan--that were submitted by LTV employees whose compensation claims were not bonded.
claim against the Debtors for post-petition patent infringement.
Aetna seeks review of an interlocutory order of the United States District Court for the Southern District of New York, Michael B. Mukasey, Judge, dated June 11, 1993, affirming an order of the United States Bankruptcy Court for the Southern District of New York, Francis G. Conrad, Judge, entered May 25, 1993, which, inter alia, denied Aetna's motion to compel the Debtors to reserve fully for Aetna's asserted administrative priority claims pending their appeal.
On June 14, 1993, Frito-Lay and Aetna moved this Court to stay confirmation of the Debtors' plan of reorganization and to grant expedited review of these appeals. On June 16, 1993, this court granted an interim stay, which preserved the status quo until a regularly scheduled motions panel of this Court could conduct a hearing. After hearing argument on June 22, 1993, the motions panel refused to issue a further stay but granted Frito-Lay's and Aetna's motions to expedite the appeals that we now decide.
On July 16, 1986, the Debtors filed the first of their petitions for reorganization under Chapter 11 of the Bankruptcy Code. 11 U.S.C. Sec. 1101, et seq. The bankruptcy court confirmed the Debtors' Plan by order entered May 27, 1993. The Plan went into effect on June 28, 1993, and was then or soon thereafter "substantially consummated" as that term is defined in Section 1101(2) of the Bankruptcy Code. 11 U.S.C. Sec. 1101(2) (1988). Section 1101(2) defines "substantial consummation" as: "(A) transfer of all or substantially all of the property proposed by the plan to be transferred; (B) assumption by the debtor or by the successor to the debtor under the plan of...
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