478 F.3d 452 (2nd Cir. 2007), 05-2236, In re Iridium Operating LLC
|Docket Nº:||Docket No. 05-2236-BK.|
|Citation:||478 F.3d 452|
|Party Name:||In re IRIDIUM OPERATING LLC, Iridium Capital Corp., Iridium IP LLC, Iridium LLC, Iridium Roaming LLC, Iridium (POTOMAC) LLC, and Iridium Promotions, Inc., Debtors. Motorola, INC., Appellant, v. OFFICIAL COMMITTEE OF UNSECURED CREDITORS AND JPMORGAN CHASE BANK, N.A., Appellees.|
|Case Date:||March 05, 2007|
|Court:||United States Courts of Appeals, Court of Appeals for the Second Circuit|
Argued: May 11, 2006.
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Garrett B. Johnson, Kirkland & Ellis LLP, Chicago, IL (James H.M. Sprayregen, Kirkland & Ellis LLP, Chicago, IL; Frank Holozubiec and Gregory T. Heyman, Kirkland & Ellis LLP, New York, NY), for Appellant.
Martin J. Bienenstock, Weil, Gotshal & Manges LLP, New York, N.Y. (Greg A. Danilow and Diane Harvey, Weil, Gotshal & Manges LLP, New York, NY), for Appellee Official Committee of Unsecured Creditors.
Andrew D. Gottfried, Morgan, Lewis & Bockius LLP, New York, N.Y. (Richard S. Toder, William C. Heuer and Robert E. Cortes, Morgan, Lewis & Bockius LLP, New York, NY), for Appellee JPMorgan Chase Bank, N.A.
Before: SOTOMAYOR, WESLEY, AND HALL, Circuit Judges.
WESLEY, Circuit Judge:
There is little doubt that settlements of disputed claims facilitate the efficient functioning of the judicial system. In Chapter 11 bankruptcies, settlements also help clear a path for the efficient administration of the bankrupt estate, including any eventual plan of reorganization. Before pre-plan settlements can take effect, however, they must be approved by the bankruptcy court pursuant to Bankruptcy Rule 9019.
This case requires us to determine whether a long-standing creditor protection--the Bankruptcy Code's priority scheme for reorganization plan distributions--applies to bankruptcy court approval of a settlement under Rule 9019. We hold that in the Chapter 11 context, whether a pre-plan settlement's distribution plan complies with the Bankruptcy Code's priority scheme will be the most important factor for a bankruptcy court to consider in approving a settlement under Bankruptcy Rule 9019. In most cases, it will be dispositive.
Iridium Operating LLC ("Iridium") 1 is currently in Chapter 11 proceedings. A consortium of lenders represented by JPMorgan Chase Bank, N.A. (the "Lenders"), 2 asserted liens over much of what is left of Iridium. The Official Committee of Unsecured Creditors (the "Committee") vigorously contested those liens; in particular, the Committee objected to the Lenders' claim to Iridium's remaining cash held in accounts at Chase. The Committee also sought to pursue claims against Motorola, Inc. ("Motorola"), Iridium's former parent company, but lacked money to fund the litigation. The Committee and the Lenders ultimately decided to settle their dispute and sought court approval of their settlement (the "Settlement") under Bankruptcy Rule 9019. The Settlement concedes the liens and distributes the Estate's cash to the Lenders and to a litigation vehicle set up to sue Motorola. Motorola, also an administrative--and, therefore, priority--creditor, objects to the Settlement on the grounds that it takes a portion of estate property and distributes it to lower priority creditors (the litigation vehicle and the Committee) before any payments are made to Motorola.
Motorola envisioned that the Iridium system would be the first network to provide voice and data communication anywhere on the globe using a complex scheme that linked handheld wireless devices to a network of low orbit satellites and ground stations. From 1987 until 1993, Motorola oversaw the system's development, with the project first taking form in 1991 as a subsidiary of Motorola. See In re Iridium Operating LLC, 285 B.R. 822, 824-25 (S.D.N.Y.2002). In 1993, Motorola spun off Iridium after entering into a "series of contracts with Iridium concerning the design, construction and launch of the Iridium System." 3 Id. at 825. By 1997, all of the assets of the Iridium System had been shifted into Iridium Operating LLC, a company wholly owned by Iridium LLC, Chase Manhattan Bank v. Motorola, Inc., 136 F.Supp.2d 265, 266 (S.D.N.Y.2001), although Iridium continued to pay Motorola for maintaining and operating the Iridium System. Iridium's commercial services were launched on November 1, 1998.
Skeptics' assertions that there would be little demand for the service were quickly confirmed. As of March 31, 1999, Iridium had over $4 billion in debt and only 10,294
subscribers, far fewer than the one million subscribers observers predicted it would need to be viable. See In re Iridium, No. 01 Civ. 5429(GBD), 2005 WL 756900, *1 (S.D.N.Y. Apr.4, 2005); Chase Manhattan Bank v. Motorola, Inc., 184 F.Supp.2d 384, 386 (S.D.N.Y.2002). On August 13, 1999, Iridium Operating and Iridium LLC filed voluntary Chapter 11 bankruptcy petitions in United States Bankruptcy Court for the District of Delaware. Those petitions were later transferred to bankruptcy court in the Southern District of New York, where involuntary Chapter 11 bankruptcy petitions had been filed on the same day. Iridium continues to operate its business and manage its properties as debtor-in-possession.
Relevant Credit Facilities and the Lenders' Purported Liens
In the months before Iridium announced its collapse, it borrowed $1.55 billion from the Lenders. Chase, 184 F.Supp.2d at 386. Although there were a number of agreements, or credit facilities, one executed on December 23, 1998 is most relevant here. That "Senior Secured Credit Agreement" provided for an $800 million loan to Iridium. Id. This credit agreement served as the basis for the Lenders assertion that they obtained "valid, enforceable, properly perfected liens" on, and security interests in, all of Iridium's property, including: roughly $156 million in cash deposits; the satellite operations center and a real property lease in northern Virginia; $243 million in reserve capital calls; the satellites; and various causes of action, including claims against Motorola.
Post-petition, Iridium still needed money to run its daily operations. The Lenders and Iridium entered into a series of six cash collateral stipulations that allowed Iridium to draw out cash to pay for basic operating expenses while the Lenders maintained their possessory liens on the remaining balances. Each of the stipulations declared that the liens were valid, enforceable, and perfected. 4 The stipulations further provided that any party in interest could contest the stipulations, if they filed an adversary proceeding within a specified period. 5 Both Iridium and Motorola signed the Third Cash Collateral Stipulation, dated December 15, 1999. Motorola did not challenge the Third Cash Collateral Stipulation out of its desire "to avoid liability relating to de-orbiting Iridium's 66 satellites." At the hearing to approve
the Settlement, the Committee candidly acknowledged that it was unclear whether Motorola could challenge the Lenders' purported liens under the terms of the stipulation had it attempted to file an objection during the prescribed time period.
The Committee's Challenge to the Lenders' Purported Liens
Unlike Motorola, the Committee did challenge the validity of the Lenders' purported liens. The Committee retained special counsel to investigate the validity of the liens and, following what the Committee described as an extensive investigation, it "determined that the Estate possessed several potentially meritorious causes of action against [the Lenders.]" The Committee specifically objected to any attempts by the Lenders to assert liens over Iridium's remaining cash, held by Chase. The Committee argued that upwards of "90% of the cash and securities on hand at Iridium as of the Petition Date ..." was transferred to Iridium within 90 days of the Petition Date, August 13, 1999, and therefore any security interest or lien asserted by the Lenders in that cash was avoidable under the Bankruptcy Code. See 11 U.S.C. § 547(b). The Committee noted that it stood to recover at least $260 million if it was successful on just one of its challenges. The Committee also claimed that several interest payments made to the Lenders just before the filing of the petition for bankruptcy were avoidable. Additionally, the Committee contended that any purported liens resulting from the Cash Collateral Stipulations were similarly avoidable.
The bankruptcy court authorized the Committee, on June 7, 2000, to commence adversarial proceedings on behalf of the Estate against the Lenders as to the debt "and any lien, pledge or security interest of Chase and/or the Lenders."
The Committee Pursues Motorola
The Committee was busy on another front as well. Just before the Committee sought authorization to commence an action against the Lenders, it moved for permission to press claims against Motorola. The Committee argued that Iridium had causes of action against Motorola for breach of contract, breach of fiduciary duty, and avoidance of fraudulent conveyances. In the suit against Motorola, the Estate, via the Committee, seeks billions of dollars in damages. The Committee contends that the causes of action grew "out of the incredibly unique relationship between Motorola and Iridium pursuant to which Motorola dominated and controlled all critical aspects of Iridium's operations, finances and corporate governance." According to the Committee, while Iridium was still a subsidiary "Motorola caused Iridium to execute a series of one-sided, overreaching contracts extremely lucrative to Motorola and grossly unfair to Iridium from a financial, legal and risk allocation perspective." The Committee further alleges...
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