In re Stone & Webster, Inc., Case No. 00–02142 (MFW)

• Decision Date: 29 February 2016
• Docket Number: Case No. 00–02142 (MFW)
• Parties: In re: Stone & Webster, Incorporated, et al., Debtors.
• Court: U.S. Bankruptcy Court — District of Delaware

547 B.R. 588

In re: Stone & Webster, Incorporated, et al., Debtors.

Case No. 00–02142 (MFW)

United States Bankruptcy Court, D. Delaware.

Signed February 29, 2016

Karen C. Bifferato, Connolly Gallagher LLP, The Brandywine Building, Donald J. Detweiler, Saul Ewing LLP, Gary M. Ford, Groom Law Group, Chtd., Gregg M Galardi, DLA Piper LLP (US), Gary Adam Rubin, Robert Alan Weber, Skadden Arps Slate Meagher & Flom LLP, Wilmington, DE, Douglas N. Currault, II, New Orleans, LA, Eric M. Davis, for Debtors.

OPINION¹

Mary F. Walrath

, United States Bankruptcy Judge

Before the Court is the Objection of the SWE & C Liquidating Trustee (the "Trustee") to claims filed by Travelers Indemnity Company and its affiliates, including Travelers Casualty and Surety Company ("Travelers"). For the reasons set forth below, the Court will sustain the Objection in part.

I. FACTS

The Aetna Casualty and Surety Company ("Aetna") issued a series of commercial insurance policies to Stone & Webster Engineering Corporation ("S & W") for the period January 1, 1979, to December 31, 1994. (D.I. 6898 at 3.) The policies were retrospective premium ("retro-premium") policies. (Pretrial Order Admitted Facts 7, 8.) Under a retro-premium policy, the insured pays an initial premium and then pays additional premiums based on its loss experience. (6/9/15 Tr. at 71–72.) The retrospective component of the insurance program was set forth in proposals and premium agreements that Aetna sent to S & W as it renewed its insurance annually and established the governing contract for each policy year (the "Retro Agreements"). (Exs. 4–19; 6/9/15 Tr. at 44.)

Generally, the Retro Agreements identified future dates when the insured's actual loss experience would be computed. (Ex. 7 at 2.) Aetna billed S & W for premium adjustments annually under the Retro Agreements from the start of the insurance program through the 1995 adjustment. (6/9/15 Tr. at 75–76; Exs. 31, 32, 33, 34, 39, 40, 41, 44, 45, 47, 48, 52, & 53.) The adjustment became final unless the insurer or the insured requested a further adjustment within 90 days. (Ex. 7 at 3–4; Ex. 11 at 4.)

In 1996, Travelers acquired Aetna's property and casualty operations and succeeded to Aetna's rights and responsibilities under the Aetna–S & W insurance program. (Pretrial Order Admitted Fact 2.) Travelers did not calculate a premium adjustment in 1996 because of disruptions associated with the merger with Aetna. (6/9/15 Tr. at 74–75.) Travelers resumed premium adjustments in 1997, performing a single adjustment for a two-year period (the "1996–97 Adjustment"). (Ex. 56.) On March 2, 1998, Travelers billed S & W $1,941,086 for the 1996–97 Adjustment. (Ex. 54 at 1.) Travelers negotiated with S & W's insurance broker over the next several months regarding disputed items in the 1996–97 Adjustment, which they ultimately resolved. (6/10/15 Tr. at 86.) During this period, Travelers computed the premium adjustment owed for 1998 (the "1998 Adjustment"). (Ex. 69.) On January 21, 2000, Travelers billed S & W $3,616,053, an amount reflecting the agreed sum owed for the 1996–97 Adjustment and the 1998 Adjustment. (Id. )

S & W requested additional time to pay the amount outstanding under the 1996–97 and 1998 Adjustments and agreed to sign a promissory note covering those amounts (the "Promissory Note"). (6/10/15 Tr. at 70.) The interest rate on the Promissory Note was the prime rate of nine percent. (6/10/15 Tr. at 8.) On March 2, 2000, S & W made a payment of $723,210.60 (the "Down Payment") and the remaining balance due ($2,892,842.40) was reflected as the principal amount of the Promissory Note. (6/9/15 Tr. at 43–44; Ex. 606 at ¶ 6.) S & W's treasurer signed the Promissory Note on April 3, 2000. (6/9/15 Tr. at 8.) S & W paid Travelers two installments of $301,350.95 each (the "Installment Payments") on the Promissory Note before S & W and its affiliates (the "Debtors") filed chapter 11 petitions on June 2, 2000. (6/9/15 Tr. at 109.) The amount outstanding on the Promissory Note as of the petition date was $2,311,836.82. (Ex. 3 at 5.)

Travelers filed identical proofs of claim in an unliquidated amount against each of the 73 Debtors on August 25, 2000 (the "2000 Claim"). (Ex. 1.) On June 15, 2001, Travelers amended the 2000 Claim, asserting a liquidated amount totaling $7,604,232 (the "2001 Claim"). (Ex. 2.) The 2001 Claim amount included an "ultimate" calculation, or an estimate of what the total premium obligation would be. (6/9/15 Tr. at 43, 51, & 56.) It is Travelers' practice to calculate and submit ultimate claims when an insured files for bankruptcy because it cannot bill a bankrupt post-petition for any adjustment as the loss experience creates additional retro-premium obligations. (6/9/15 Tr. at 52.)

S & W, in its capacity as debtor-in-possession, disputed the amount of the 2001 Claim. S & W and Travelers eventually agreed to a reduced claim of $6,615,514. (6/9/15 Tr. at 84–85; Ex. 604.) On January 16, 2004, S & W's Plan of Reorganization was confirmed. (D.I.4879.) Under the Plan, S & W and its affiliates' assets were transferred to the SWE & C Liquidating Trust. Travelers and S & W filed a motion to approve the settlement of the 2001 Claim, to which the Trustee objected. (D.I.4587, 5453.) As a result of the Trustee's objection, the 2001 Claim settlement was never approved.

In March 2005, the Trustee filed an objection to the 2001 Claim and served discovery on Travelers in June of that year. (D.I.5534.) Travelers objected to several of the discovery requests prompting the Trustee to file a motion to compel in October 2005. (D.I.5793.) In May 2011, the Trustee voluntarily withdrew his motion to compel.² (D.I.6563.)

In December 2011, the Trustee moved for summary judgment on his objection to the 2001 Claim. (D.I.6596.) Judge Walsh denied the motion because of the complexity of the underlying factual issues. (D.I.6649.) Judge Walsh set a pretrial hearing and discovery deadline for December 3, 2012. (D.I.6660.)

In November 2012, Travelers again amended its proof of claim, asserting a claim in the amount of $8,181,492.82 (the "2012 Claim"). (Exs. 3 and 4.) The 2012 Claim consisted of three components: (1) the premium invoiced pre-petition including the amount outstanding on the Promissory Note and the 1999 premium adjustment, totaling $2,642,623.82; (2) a premium due based on S & W's actual loss experience from 1999 to 2012, amounting to $5,226,881; and (3) an estimated future premium for losses incurred but not reported ("IBNR"), amounting to $311,988. (6/9/15 Tr. at 110; Ex. 3 at 6.)

On December 10, 2014, S & W's case was reassigned. (D.I.6844.) Evidentiary hearings were held on June 9, 10, and 12, 2015. The Court took the matter under advisement and directed post-trial briefing. A notice of completion of briefing was submitted on September 10, 2015, and the matter is ripe for decision. (D.I.6951.)

II. JURISDICTION

The Court has subject matter jurisdiction over this contested matter. 28 U.S.C. §§ 1334(b)

& 157(b)(1). The Court may enter a final order in matters concerning claim allowance. Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 2611, 180 L.Ed.2d 475 (2011).

III. DISCUSSION

A. Section 502(d)

The Trustee argues that the Promissory Note is an avoidable fraudulent transfer under section 548 and that the Installment Payments made on it are avoidable preferential transfers under section 547. Although the two-year statute of limitations for commencing an avoidance action expired before he was appointed, the Trustee argues he is not barred from using avoidance "defensively" under section 502(d). In other words, the Trustee is not seeking to recover money from Travelers by means of an avoidance action; rather the Trustee is seeking the disallowance of Travelers' claim. The Trustee argues that to the extent Travelers is entitled to an allowed claim, it must be disallowed because Travelers has failed to return the Down Payment and Installment Payments (the alleged avoidable transfers) to S & W.

Travelers responds that the Trustee cannot defensively use avoidance through section 502(d) to disallow Travelers' claim because he has not obtained (and cannot obtain—because of the running of the statute of limitations) a judicial determination that the transfers were fraudulent or preferential. See, e.g., Giuliano v. Mitsubishi Digital Elec. Am. (In re Ultimate Acquisition Partners, LP), No. 11–10245, 2012 WL 1556098, at *3 (Bankr.D.Del. May 1, 2012)

(holding that "[a] debtor or trustee wishing to avail itself of the benefits of section 502(d) must first obtain a judicial determination on the preference complaint") (citations and internal quotations omitted).

Travelers further argues that in the event the Promissory Note and the payments made are determined to be avoidable, Travelers must have the opportunity to return such payments before its claim is disallowed. In re KB Toys Inc., 736 F.3d 247, 252 (3d Cir.2013)

("Accordingly, ‘any claim’ falling into this category of claims is disallowable until the avoidable transfer is returned."). See also In re Asia Global Crossing, Ltd., 344 B.R. 247, 251 (Bankr.S.D.N.Y.2006) ("[Section] 502(d) disallows the claim of a creditor that received a transfer avoidable under chapter 5 of the Bankruptcy Code unless the creditor returns the transfer to the estate.") (emphasis omitted).

Section 502(d) provides that "the court shall disallow any claim of an entity ... that is a transferee of a transfer avoidable under section ... 547, 548, ... of this title, unless such entity or transferee has paid the amount, or turned over any such property...." 11 U.S.C. § 502(d)

. Stated simply, section 502(d) contains two requirements before a court must disallow a claim: (1) a transfer must be avoidable under the applicable section, and (2) the transferee must fail to pay or turn over the avoidable money or property.

An avoidance action must be brought within the later of two years after the commencement of the bankruptcy case or one year...