89 F.3d 942 (2nd Cir. 1996), 166, In re Chateaugay Corp.

Docket Nº:166, Docket 95-5012.
Citation:89 F.3d 942
Party Name:In re CHATEAUGAY CORPORATION, Reomar, Inc., The LTV Corporation, et al., Debtors. The AETNA CASUALTY AND SURETY COMPANY, Appellant, v. CLERK, U.S. BANKRUPTCY COURT, NEW YORK, NY, Real Party in Interest, Chateaugay Corporation; Reomar, Inc.; and The LTV Corporation, et al., Debtors-Appellees.
Case Date:July 18, 1996
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

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89 F.3d 942 (2nd Cir. 1996)


Corporation, et al., Debtors.




Chateaugay Corporation; Reomar, Inc.; and The LTV

Corporation, et al., Debtors-Appellees.

No. 166, Docket 95-5012.

United States Court of Appeals, Second Circuit

July 18, 1996

Argued Nov. 20, 1995.

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Larry L. Simms, Washington, D.C. (Thomas G. Hungar, Gibson, Dunn & Crutcher, Washington, D.C.; James P. Ricciardi, Audrey S. Trundle, W. James Hall III, Gibson, Dunn & Crutcher, New York City; Harold S. Horwich, G. Eric Brunstad, Jr., Hebb & Gitlin, Hartford, Connecticut, of counsel), for Appellant.

Michael J. Crames, New York City (Edmund M. Emrich, Kaye, Scholer, Fierman, Hays & Handler, Davis, Polk & Wardwell, Seward & Kissel, of counsel), for Appellees.

Before: CARDAMONE, WALKER and PARKER, Circuit Judges.

CARDAMONE, Circuit Judge:

This is an appeal in a case arising out of the bankruptcy of The LTV Corporation and its 66 subsidiaries (collectively LTV, debtors, or appellees). LTV is involved in a variety of industries, including steel, energy, and aerospace. It filed for Chapter 11 protection on July 17, 1986 (the filing date), and the subsequent reorganization has proven to be one of the longest, most complex, and most extensively litigated bankruptcy proceedings in history. Numerous lawsuits arising from LTV's troubles have implicated a myriad of social, political and economic issues and have touched upon legal subjects running the gamut from ERISA to environmental law. See, e.g., Pension Benefit Guaranty Corp. v. LTV Corp., 496 U.S. 633, 110 S.Ct. 2668, 110 L.Ed.2d 579 (1990) (holding that PBGC restoration of pension plans previously terminated was permissible); United States v. LTV Corp. (In Re Chateaugay Corp.), 944 F.2d 997 (2d Cir.1991) (deciding that certain CERCLA claims are prepetition claims if response costs arose in relation to prepetition pollution).

The appeal before us now concerns but a small piece of the puzzle surrounding LTV's bankruptcy reorganization. We are asked to decide two questions. First, we must determine whether the debtors acted appropriately when, in their proffered plan of reorganization, they classified the Aetna Casualty and Surety Company's (Aetna, surety, or appellant) surety-reimbursement claims in a separate category from LTV's unpaid workers' compensation obligations. Second, we must decide whether Aetna's claims for surety reimbursement are entitled to the priority ordinarily given to excise taxes. This second issue requires us to decide whether to implement a renumbering in an Act of Congress according to its literal terms even when doing so would lead to absurd and unintended results and require the enforcement of an obvious cross-referencing error. To resolve this issue demands construction of the subject section of the Bankruptcy Code and is a matter we unravel in the discussion in Part II.

The United States District Court for the Southern District of New York (Patterson, J.), acting in its appellate capacity in bankruptcy matters, rejected both of Aetna's contentions, In Re Chateaugay, 177 B.R. 176 (S.D.N.Y.1995) (Chateaugay II ), and affirmed the decision of the Bankruptcy Court for the Southern District of New York (Conrad, J.), In Re Chateaugay, 155 B.R. 625 (Bankr.S.D.N.Y.1993) (Chateaugay I ).


LTV filed for bankruptcy protection pursuant to Chapter 11 of the Bankruptcy Code on July 17, 1986. At the same time, LTV Steel, a subsidiary, successfully moved for authority to meet certain employee-related obligations. The bankruptcy court ordered that the debtors "be ... authorized and empowered to pay all employees' workers' compensation, 'black lung' and related benefits and claims which arose or accrued prior to the Filing Date." Chateaugay II, 177 B.R. at 178. This allowed LTV to satisfy prepetition workers' compensation obligations. In accordance with the court order LTV made payments in those states where it maintained self-insured status and defaulted in those states where other sources of payment existed. This arrangement ensured that LTV's injured workers would not be left without compensation.

Long before the filing date, Aetna had issued numerous surety bonds on behalf of

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LTV, including workers' compensation bonds, to secure payment of LTV's employee obligations under the laws of Kentucky, Minnesota, New York, Pennsylvania, Washington, and West Virginia (collectively the bonded states). Aetna, in effect, guaranteed payment of LTV's obligations in these bonded states. Therefore, when LTV filed for bankruptcy and subsequently halted workers' compensation payments in the bonded states, Aetna, as surety, was obliged to pay $38 million to cover LTV's prepetition workers' compensation claims. Chateaugay II, 177 B.R. at 178. In four of these states (Minnesota, New York, Washington and West Virginia), had Aetna failed to pay LTV's obligations, the states would have become responsible (under state law) for paying the claims of LTV's injured workers. Id. at 183 & n. 4.

LTV filed its Second Modified Joint Plan of Reorganization and Second Modified Disclosure Statement (the plan) on February 26, 1993. The plan is nearly 200 pages long and addresses all aspects of LTV's filing and reorganization, including such topics as environmental problems, labor issues, securities law, and financial projections. It provides for the reorganization of four groups of LTV companies--the Parent Group and the Steel, Aerospace, and Energy Groups--and for liquidation of the AM General Group.

For our purposes, the only relevant portion of the plan concerns its treatment of the prepetition workers' compensation claims that arose from three different parts of LTV--the Parent Group, the Steel Group, and the Energy Group. Unpaid employee claims from each of these three groups were placed into a single class--6.10, 6.20, 6.50, respectively. Already-paid injured workers--and creditors asserting claims derivatively through them--were placed in a separate class for each group--5.10, 5.20, and 5.50, respectively. Classes 6.10, 6.20, and 6.50, composed of the unpaid workers' claims, received priority status and were unimpaired. Classes 5.10, 5.20, and 5.50, including those claiming derivatively through the paid workers' claims, remained impaired.

Before the plan was filed, all the workers' compensation demands were classified as general unsecured claims. Under the plan, unpaid workers are guaranteed full payment, while paid workers and creditors with derivative claims--including sureties like Aetna--are not. Payment to them will be in the same form as payment to other general unsecured creditors: certificates for shares of new LTV common stock issued after confirmation of the plan. Ultimately--should Aetna's objections to the plan be unavailing--Aetna will be paid only a portion of its original claim--somewhere between 37 and 44 cents on the dollar.

This classification system means that the debtors' plan provides special treatment to workers. An LTV Steel industrial relations executive explained that "[a]ny failure to satisfy workers' compensation obligations would ... elicit a negative reaction from the unions representing [LTV's] employees." LTV views the cooperation of their workforce as "an absolute necessity for the viability of the restructured company." Chateaugay II, 177 B.R. at 186. As Aetna and other sureties will not play a similarly vital role in reorganization, their claims were not classified with the claims of unpaid workers.

In the bankruptcy court, and then on appeal to the district court, Aetna objected to the plan. It asserted that separate classification of its claims and the claims of the unpaid workers was improper. Aetna also argued that some of its claims should have received excise tax priority under the Code. It also sought administrative expense priority for these reimbursement claims. As noted, the bankruptcy and district courts denied the surety's objections. See Chateaugay II, 177 B.R. at 187. Aetna now appeals, challenging the adverse decisions with respect to classification and excise tax priority. We affirm.


Initially, we note that a district court order issued in its appellate capacity is subject to plenary review. We examine the factual findings made by the bankruptcy court under the clearly erroneous standard and its legal conclusions de novo. Liona Corp. v. PCH Assocs. (In Re PCH Assocs.), 949 F.2d 585, 597 (2d Cir.1991).

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I Classification of Aetna's Claims

Aetna's first argument is that its claims must be paid in full because the plan guarantees full satisfaction of the debtors' workers' compensation obligations. According to the surety, its claims are the workers' claims through subrogation. Appellant insists that as a result of its payments as a surety, it was subrogated to the rights of LTV's workers. As LTV's plan proposes to pay all workers' claims in full, Aetna seeks full payment as a subrogee of those workers whose claims it paid. Appellant also asserts that the plan improperly classifies its claims so as to deprive it of full payment. The questions of subrogation and classification are analytically distinct, and we discuss them separately.

  1. Subrogation

    Since Aetna was LTV's surety, its claim is initially governed by 11 U.S.C. § 509 (1994), entitled "Claims of codebtors." This Code provision is the statutory enactment of the long-standing doctrine of equitable subrogation. In equity, the rule was that "[w]here property of one person is used in discharging an...

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