Chateaugay Corp., In re
| Decision Date | 10 April 1992 |
| Docket Number | No. 727,D,727 |
| Citation | 961 F.2d 378 |
| Parties | , 26 Collier Bankr.Cas.2d 1174, 22 Bankr.Ct.Dec. 1347, Bankr. L. Rep. P 74,550 In re CHATEAUGAY CORPORATION; Reomar, Inc.; and LTV Corporation, Debtors. The LTV CORPORATION, Plaintiff-Appellee, The Official Committee of Unsecured Creditors of LTV Steel Company, Inc., Intervenor-Appellee, v. VALLEY FIDELITY BANK & TRUST COMPANY, as Trustee, Defendant-Appellant, The New Connecticut Bank and Trust Company, N.A.; The Connecticut National Bank; Huntington National Bank; IBJ Schroder Bank & Trust Company; Maryland National Bank; and Team Bank, N.A., Intervenors-Appellants. ocket 91-5098. |
| Court | U.S. Court of Appeals — Second Circuit |
John A. Walker, Jr., Knoxville, Tenn., (Walker & Walker, of counsel), for defendant-appellant.
James J. Tancredi, Katherine Burroughs, Day, Berry & Howard, Hartford, Conn., of counsel, for intervenor-appellant The New Connecticut Bank and Trust Co., N.A.
Alan E. Lieberman, Ira H. Goldman, Deborah S. Frisone, Shipman & Goodwin, Hartford, Conn., of counsel, for intervenor-appellant The Connecticut National Bank.
Lawrence E. Oscar, Hahn Loeser & Parks, Cleveland, Ohio, of counsel, for intervenor-appellant Huntington National Bank.
Paul L. Bindler, Shalom Jacob, Rosenman & Colin, New York City, of counsel, for intervenor-appellant IBJ Schroder Bank & Trust Co.
Brooke Schumm III, Baltimore, Md. (Semmes, Bowen & Semmes, of counsel), for intervenor-appellant Maryland National Bank.
Judith W. Ross, Thompson & Knight, Dallas, Tex., of counsel, for intervenor-appellant Team Bank, N.A.
Karen E. Wagner, New York City (Maryellen Abely, Davis Polk & Wardwell; Arlene R. Alves, Kaye, Scholer, Fierman, Hays & Handler, of counsel), for plaintiff-appellee.
Lisa Rosenthal, New York City (Mark A. Speiser, Stroock & Stroock & Lavan, of counsel), for intervenor-appellee The Official Committee of Unsecured Creditors of LTV Steel Co., Inc.
Before OAKES, Chief Judge, PRATT and MINER, Circuit Judges.
Valley Fidelity Bank & Trust Co. ("Valley") and intervenors appeal from a judgment of the United States District Court for the Southern District of New York, Shirley Wohl Kram, Judge, affirming a judgment of the United States Bankruptcy Court for the Southern District of New York, Burton R. Lifland, Chief Judge. The bankruptcy court granted partial summary judgment in favor of the debtor, the LTV Corporation ("LTV"), disallowing Valley's claims to the extent they included unamortized original issue discount ("OID"). On this appeal, Valley argues that the bankruptcy court and district court erred by holding (1) that new OID arose on an exchange of debt securities performed as part of LTV's failed attempt to avoid bankruptcy through a consensual workout, and (2) that amortization of OID should be calculated by the constant interest method, rather than by the straight line method. For the reasons set forth below, we reverse in part and affirm in part. We hold first that while claims must be disallowed to the extent of unamortized OID, no new OID arose on LTV's debt-for-debt exchange, and second, that OID amortization should be calculated by the constant interest method.
In July 1986, LTV, a steel company that makes defense and industrial products, filed for Chapter 11 reorganization along with sixty-six of its subsidiaries. LTV filed objections in September 1989 to two proofs of claim, numbers 20,069 and 20,067, filed in November 1987 by Valley on behalf of the holders of two securities, the "Old Debentures" and the "New Notes." Valley is the trustee for both the Old Debentures and the New Notes.
The Old Debentures are 13 7/8% Sinking Fund Debentures due December 1, 2002, of which LTV had by December 1, 1982 issued a total face amount of $150,000,000. Of that face amount, $125,000,000 had been issued to the public, for which LTV received The New Notes are LTV 15% Senior Notes due January 15, 2000. In May 1986, LTV offered to exchange $1,000 face amount of New Notes and 15 shares of LTV common stock for each $1,000 face amount of Old Debentures. As of June 1, 1986, $116,035,000 face amount of Old Debentures had been exchanged for the same face amount of New Notes and LTV Common Stock.
$110,835,000 in cash. The remaining $25,000,000 had been issued to subsidiary pension funds, in lieu of cash contributions of $22,167,000. The proceeds received for the Old Debentures thus amounted to 88.67% of their face value
In its proofs of claim, Valley did not deduct any amount for unamortized OID. LTV objected to the claims and moved for partial summary judgment, seeking an order disallowing unamortized OID. LTV argued that unamortized OID is unmatured interest which is not allowable by virtue of section 502(b)(2) of the Bankruptcy Code, 11 U.S.C. § 502(b)(2) (1988), and that therefore the claims must be reduced by the amount of unamortized OID. A number of other creditors intervened to address questions of law that they believe may affect their own claims against LTV.
The bankruptcy court granted partial summary judgment for LTV. In re Chateaugay Corp., 109 B.R. 51, 58 (Bankr.S.D.N.Y.1990). The court held that unamortized OID is not allowable under section 502(b)(2), and that the proper method for calculating unamortized OID is the constant interest method. Id. The court also held that as indenture trustee, Valley was the proper party in interest to receive notice of LTV's objections. Id. Concluding that the amount of unamortized OID on the Old Debentures could be calculated using uncontroverted evidence, but that the amount on the New Notes could not be calculated until a disputed fact--the fair market value of the Old Debentures at the time of the exchange--was resolved, the court granted LTV's motion except as to the amount of unamortized OID on the New Notes. Id.
LTV and Valley thereafter stipulated to $3,554,609 and $8,174,134 as the amount of unamortized OID on the Old Debentures and the New Notes, respectively, calculated in accordance with the bankruptcy court's opinion. After that stipulation, Judge Lifland on March 27, 1990 entered a judgment partially disallowing, in the above amounts, Valley's proofs of claim. The district court affirmed the bankruptcy court's decision in its entirety. In re Chateaugay Corp., 130 B.R. 403, 405 (S.D.N.Y.1991).
Original issue discount results when a bond is issued for less than its face value. The discount, which compensates for a stated interest rate that the market deems too low, equals the difference between a bond's face amount (stated principal amount) and the proceeds, prior to issuance expenses, received by the issuer. OID is amortized, for accounting and tax purposes, over the life of the bond, with the face value generally paid back to the bondholders on the maturity date. If the debtor meets with financial trouble and turns to the bankruptcy court for protection, as in the present case, then OID comes into play as one of the factors determining the amount of the bondholder's allowable claim in bankruptcy.
Section 502 of the Bankruptcy Code, the framework for Chapter 11 claim allowance, provides that a claim shall be allowed "except to the extent that ... such claim is for unmatured interest." 11 U.S.C. § 502(b)(2) (1988). The first question we face is whether unamortized OID is "unmatured interest" within the meaning of section 502(b)(2). We conclude that it is. As a matter of economic definition, OID constitutes interest. United States v. Midland-Ross Corp., 381 U.S. 54, 57, 85 S.Ct. 1308, 1310, 14 L.Ed.2d 214 (1965) (); see also Frank J. Slagle, Accounting for Interest: An Analysis of Original Issue Discount in the Sale of Property, 32 S.D.L.Rev. 1, 21 n. 108 (1987) (). Moreover, the Bankruptcy Code's legislative history makes inescapable the conclusion that OID is interest within the meaning of section 502(b)(2). The House committee report on that section explains:
Interest disallowed under this paragraph includes postpetition interest that is not yet due and payable, and any portion of prepaid interest that represents an original discounting of the claim, yet that would not have been earned on the date of bankruptcy. For example, a claim on a $1,000 note issued the day before bankruptcy would only be allowed to the extent of the cash actually advanced. If the original issue discount was 10% so that the cash advanced was only $900, then notwithstanding the face amount of [the] note, only $900 would be allowed. If $900 was advanced under the note some time before bankruptcy, the interest component of the note would have to be pro-rated and disallowed to the extent it was for interest after the commencement of the case.
H.Rep. No. 595, 95th Cong., 1st Sess. 352-53 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 5963, 6308-09.
The courts that have considered the issue under section 502(b)(2) have held that unamortized OID is unmatured interest and therefore unallowable as part of a bankruptcy claim. In re Public Service Co. of New Hampshire, 114 B.R. 800, 803 (Bankr.D.N.H.1990); In re Allegheny Int'l, Inc., 100 B.R. 247, 250 (Bankr.W.D.Pa.1989); see also In re Pengo Indus., Inc., 129 B.R. 104, 108 (N.D.Tex.1991). But cf. In re Radio-Keith-Orpheum Corp., 106 F.2d 22, 27 (2d Cir.1939) (), cert. denied, 308 U.S. 622, 60 S.Ct. 380, 84 L.Ed. 520 (1940). The Public Service court stated it plainly: "The word 'interest' in the statute is clearly sufficient to encompass the OID variation in the method of providing for and collecting what in economic fact is interest to be paid to compensate for the delay and risk involved in the...
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