AWECO, Inc., Matter of
| Decision Date | 21 February 1984 |
| Docket Number | No. 82-1621,82-1621 |
| Citation | 725 F.2d 293 |
| Parties | , Bankr. L. Rep. P 69,722 In the Matter of AWECO, INC., Debtor. UNITED STATES of America, (Internal Revenue Service and Department of Energy), Plaintiffs-Appellants, v. AWECO, INC., Debtor-Appellee, and United American Car Company, Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Chief, Appellate Section, Wynette J. Hewett, Elaine Ferris, Dept. of Justice, Tax Div., Washington, D.C., for plaintiffs-appellants.
Alfred L. Ruebel, James S. Mahon, Dallas, Tex., for AWECO, Inc. Robert D. Albergotti, Dallas, Tex., for Unsecured Creditors Committee of AWECO, Inc.
King & Spalding, Frank C. Jones, Walter W. Driver, Jr., Atlanta, Ga., for United-American Car Co.
Robin Phelan, Dallas, Tex., for Unsecured Creditors Comm.
Appeal from the United States District Court for the Northern District of Texas.
Before GOLDBERG, GEE and TATE, Circuit Judges.
In this case principles of fairness and equity surface to point to the right result, even as we move through a field of law as narrow and arcane as bankruptcy. Bankruptcy decisions are often judgmental, but, they are factually oriented. In settling a lawsuit, the debtor in this case acted with the approval of the bankruptcy court, and disbursed a very significant portion of its estate to one of its unsecured, nonpriority creditors. The district court affirmed the action of the bankruptcy court. The government, as a priority creditor, claims that the bankruptcy court approved the settlement without sufficient facts to determine the payout's fairness to the government. We agree and vacate the district court's affirmance, remanding for the taking of further evidence on the settlement's fairness.
This appeal involves three parties: AWECO, Inc., United American Car Co. ("United") and the United States. Debtor, AWECO is engaged in various ventures, primarily in the oil and gas business. In early 1981, AWECO filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. 1 AWECO filed a plan of reorganization several months later, but, the plan was never presented to creditors for approval nor submitted to the court for confirmation. Four of AWECO's creditors, the Department of Energy, the IRS, Sutton Investments, Inc. ("Sutton") and United 2, have at one time or another been involved in these proceedings. The Department of Energy holds an unsecured claim for $45,000,000 based on its determination that AWECO overcharged its customers for certain crude oil the company sold. The IRS has two priority tax claims, 3 one from 1979 in the amount of $4,088,718.08, and one from 1980 in the amount of $2,058,495.50. Sutton's claim is for $7,577,584.98 and is secured by a judgment lien on certain of AWECO's assets.
United's claim, the settlement of which produced the instant appeal, is an unsecured, unliquidated claim for approximately $27 million. This claim, asserted in a lawsuit in the United States District Court for the Northern District of Georgia, stems from two contracts between United and AWECO. In these contracts, AWECO agreed to purchase approximately $40 million worth of railroad cars from United. AWECO refused to perform and United sued for breach of contract. United later amended its complaint to include allegations of fraud, asserting the $27 million damage figure. 4 After two years of litigation and while AWECO's Chapter 11 petition was pending, United and AWECO reached a negotiated settlement of the lawsuit. The settlement called for the transfer from AWECO to United of some $5.3 million worth of cash and property. The assets to be transferred included property that secured the Sutton claim, and according to the IRS, secured the larger of its tax claims.
In early November of 1981, AWECO filed notice with the bankruptcy court of its intention to settle the litigation. The Department of Energy, the IRS, Sutton and the Creditors' Committee all filed objections to the proposed settlement. The bankruptcy court held a hearing on December 30, 1981, to consider the objections. At the outset of the hearing, the Creditors' Committee withdrew its objections, but the Department of Energy, the IRS and Sutton 5 continued their opposition to the settlement. The court heard testimony from four witnesses: AWECO's president, the court-appointed examiner, the debtor's comptroller and accountant, and an attorney representing United in the Georgia litigation with AWECO.
Part of the testimony focused on the fairness of the settlement as between United and AWECO. United's counsel testified regarding the reasons United was willing to accept $5.3 million on its claim of $27 million. By reselling the railroad cars, United had been able to recoup enough of its losses to reduce the claim to $17.4 million. In addition, United wished to avoid the delay, risk and expense involved in further litigation. Even if it prevailed in the suit, United had no guarantee that it would receive as much as $5.3 million as an unsecured creditor in bankruptcy proceedings. And, United wanted to settle the case so that it could count the settlement proceeds in its 1981 taxable year. The settlement was, in fact, conditioned upon the bankruptcy court's immediate approval.
Other testimony evidenced the advantages to AWECO of the settlement. The AWECO attorney involved in the Georgia litigation stated that terminating the litigation would save an estimated $200,000--250,000 in legal expenses of trying the suit; the two years of previous litigation had cost AWECO over $700,000. He also testified as to the weakness of AWECO's primary defense to the suit. AWECO's comptroller declared that the settlement would generate a loss for the company that would carry back to offset $2-2.5 million of tax liability.
Most of the remaining testimony centered on the settlement's fairness to creditors other than United. A significant part of that testimony concerned AWECO's interest in a nonoperating oil refinery in Lake Charles, Louisiana. Previous managers had been unable to operate the refinery at a profit. AWECO's president declared that despite the refinery's history and currently deteriorating conditions, AWECO's control of the refinery would lead to profits. He also noted that the Lake Charles refinery formed the basis for a successful reorganization plan. The court-appointed examiner testified as to the refinery's liquidation value, estimating it at $13 million. 6 He admitted that he did not know whether the refinery was encumbered by prior liens. The examiner attributed his lack of knowledge regarding the existence of prior liens to his lack of direct control over the refinery. Counting the $13 million from the refinery, the examiner estimated that the proposed settlement would leave $30 million in the estate. His testimony on specific assets, however, listed properties including the refinery that totaled only $17.5 million in value.
At the close of the hearing the bankruptcy court announced it would approve the settlement. On the following day the court issued a written order, finding the settlement "fair and equitable" and "in the best interests of the Debtor, its estate, and its creditors." The court allowed a payment of $1 million to United after ten days and ordered that the final consummation of the settlement take place within a month.
The IRS and Department of Energy sought a rehearing. The judge then agreed to hear more testimony, citing doubts concerning the liquidation value of the refinery. Record, Vol. II, pp. 4-5. At the subsequent hearing, AWECO's president estimated that the entire refinery was worth $22 million--that AWECO's 56 2/3% interest would yield the company from $13 to 14 million. 7 The president arrived at the $22 million figure from his participation in sales discussions regarding the refinery. He testified, though, that no offer had been made and $22 million had only been "mentioned." In contrast to his testimony at the initial hearing, he stated that AWECO had no plans to operate the refinery. He declared that the facility would be sold.
Government counsel moved for a continuance to develop evidence with respect to the value of the refinery, but the court denied the motion. The court was only willing to grant a government request to submit an appraisal of the facility subsequent to the hearing if United would extend its time limit on confirmation of the settlement. When counsel for United stated that any stay of the court's order approving the settlement would jeopardize the deal, the court denied a stay.
The government and Department of Energy then appealed to the district court. Their arguments centered on the settlement's fairness to creditors other than United rather than any doubts regarding fairness between AWECO and United. Rejecting these arguments, the district court affirmed the lower decision. The district judge relied on the fact that the bankruptcy court had taken testimony on the settlement's fairness to creditors. He also cited the bankruptcy judge's knowledge of the case derived from months of presiding over the reorganization proceedings. The district judge concluded that, because testimony at the earlier hearings indicated that a settlement with United would give the debtor its only chance at reorganization, the settlement benefitted all creditors.
The IRS now brings this appeal. It asserts that the bankruptcy court abused its discretion in approving the settlement of the unsecured, unliquidated claim. Arguing that the bankruptcy court acted on too little information, the government contends that principles of fairness and equity fell victim to the perceived need for speed in approving the settlement.
The bankruptcy court derives its authority to approve...
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