Energy Co-op., Inc., Matter of
| Decision Date | 10 October 1989 |
| Docket Number | 88-2409 and 88-2483,Nos. 88-2408,s. 88-2408 |
| Citation | 886 F.2d 921 |
| Parties | 22 Collier Bankr.Cas.2d 1224, 19 Bankr.Ct.Dec. 1443, Bankr. L. Rep. P 73,163 In the Matter of ENERGY COOPERATIVE, INC., Debtor. Appeals of KOCH REFINING CO., Koch Fuels, Inc., Wood River Oil & Refining Co., Conoco Inc., Mobil Oil Corporation, Chevron U.S.A. Inc., Gulf Oil Corporation, Socap International, Ltd., U.S.A. Rookwood, Inc., Kerr-McGee Refining Corp., Triangle Refineries, Peerless Distributing, Valero Refining f/k/a Saber Refining, Union Oil Company of Calif., Tenneco Oil Company, Oils, Inc., Bell Fuels, Inc., Moore McCormack, Enron Oil Trading & Transportation Company, and Societe Nationale Pour La Recherche, La Production, Le Transport, La Transformation, et al Commercialisation des Hydrocarbures ("Sonatrach"), 1 Appellants. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Louis W. Levit, Richard J. Mason, Levit & Mason, Michael R. Hassen, Joni L. Goldstein, Douglas J. Lipke, Lord, Bissell & Brook, Nathan P. Eimer, Sidley & Austin, Harry Coven, Gould & Ratner, Michael L. Shakman, Miller, Shakman, Nathan & Hamilton, Alan I. Greene, G. Scott Falknor, Chadwell & Kayser, Joseph L. Matz, Holleb & Coff, Joni L. Goldstein, Barbara Bertok, J. Robert Stoll, Stuart M. Rozen, Mary T. Donoghue, Mayer, Brown & Platt, Joanne M. Harmon, Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Chester H. Foster, Jr., Arnstein & Lehr, Chicago, Ill., for appellants.
Donald R. Cassling, Jenner & Block, Nathan P. Eimer, Sidley & Austin, Matthew J. Botica, Mary Kay McCalla, Hopkins & Sutter, Michael L. Shakman, Judith S. Wolicki, Miller, Shakman, Nathan & Hamilton, Stephen Schostok, Laser, Schostok, Kolman & Frank, David Heller, Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Dennis M. O'Dea, Keck, Mahin & Cate, Louis W. Levit, Levit & Mason, Norman H. Nachman, Winston & Strawn, S.J. Adelman, Sonnenschein, Carlin, Nath & Rosenthal, David J. Fischer, Wildman, Harrold, Allen & Dixon, Aaron J. Kramer, Schiff, Hardin & Waite, J. Patrick Herald, Baker & McKenzie, A. Bruce Schimberg, Nathan P. Eimer, Sidley & Austin, Steven P. Handler, McDermott, Will & Emery, Jacob Pomeranz, Michael T. Hannafan, Hannafan & Handler, Daniel M. Pelliccioni, Katten, Muchin & Zavis, Chicago, Ill., Patrick A. Murphy, Murphy, Weir & Butler, San Francisco, Cal., John R. Brandenburg, John K. Kallman, Rudnick & Wolfe, David Brown, Laurence H. Kallen, Arnstein & Lehr, James M. Breen, Chapman & Cutler, Chicago, Ill., M. McKevitt, Rosemont, Ill., W.H. Luking, Ross & Hardies, Milton L. Fisher, Mayer, Brown & Platt, Chicago, Ill., Michael J. Madigan, Akin, Gump, Strauss, Hauer & Feld, Washington, D.C., Floyd Babbitt, Berman, Fagel, Haber, Maragos & Abrams, William E. Kelly, Pope, Ballard, Shepard & Fowle, Malcolm M. Gaynor, Schwartz, Cooper, Kolb & Gaynor, Jay A. Steinberg, Schiller, Klein & Steinberg, Pamela S. Hollis, Hollis & Johnson, N.H. Nachman, Nachman, Munitz & Sweig, Michael R. Hassan, Lord, Bissell & Brook, Chicago, Ill., for appellees.
Before BAUER, Chief Judge, KANNE, Circuit Judge, and HENLEY, Senior Circuit Judge. 2
These appeals are from orders entered by the district court in the Energy Cooperative, Inc. ("ECI") bankruptcy proceeding approving a Settlement Agreement and granting injunctive relief. The Settlement Agreement resolves nine lawsuits and several years of litigation. The parties to the Settlement Agreement are Jay A. Steinberg, the trustee in bankruptcy for ECI (the "Trustee"), the shareholders of ECI (known as the "Member-Owners" 3), and the lending banks to ECI (the "Banks" 4). The objectors to the Settlement Agreement, and the appellants in this case, are ECI creditors holding unsecured claims and those companies which had been sued by the Trustee to recover alleged preferences under Section 547 of the Bankruptcy Code.
In 1976, the Member-Owners, eight regional agricultural cooperatives, formed ECI to secure a steady supply of refined petroleum products for their businesses. They owned 100% of ECI's stock, constituted ECI's entire board of directors and were ECI's principal customers. The Member-Owners executed three contracts with ECI that became the subject of later litigation between the Trustee and the Member-Owners. The Member Subscription Agreement (the "MSA") obligated the Member-Owners under certain conditions to purchase stock so that ECI had sufficient working capital to maintain set financial ratios. As part of their obligation under the MSA, the Member-Owners executed demand promissory notes in favor of ECI in 1980. The third contract, the Member Product Purchase Agreement (the "MPPA"), obligated the Member-Owners to purchase set quantities of petroleum product each year at competitive prices.
In 1981, ECI filed a voluntary petition under Chapter 11 of the Bankruptcy Code. At the time, it owed approximately $251 million to the Banks under loans secured by substantially all of ECI's assets. The Banks also loaned ECI approximately $16 million after the petition was filed. Most of ECI's assets were liquidated and $191 million was repaid to the Banks. The Banks then intervened in a lawsuit by the debtor-in-possession against the Member-Owners. The lawsuit alleged that the Member-Owners breached the MSA and the MPPA and owed approximately $42 million on certain promissory notes payable to ECI. In support of their right to intervene, the Banks claimed that ECI's rights under these contracts were assets of the ECI estate and that, in exchange for loans made to ECI, the Banks were granted security interests in all ECI assets.
In 1983, the Banks and the Member-Owners entered into a settlement. Under the terms of the settlement, the Member-Owners paid the Banks approximately $56 million in return for which the Member-Owners received a participation in the pre-petition and post-petition loans made by the Bank to ECI and the collateral securing those loans.
In 1984, ECI converted its Chapter 11 reorganization into a Chapter 7 liquidation. Among the many lawsuits the Trustee pursued to recover estate assets were the eight lawsuits filed against the Member-Owners and Banks. In the main lawsuit, the Trustee alleged that the Member-Owners breached their obligation under the MSA to purchase stock and sought damages of $164 million. He also sought to recover on the promissory notes which the Member-Owners had issued to ECI under the MSA and which ECI had assigned to the Banks. In addition, the Trustee asserted several other claims, including breach of the MPPA, breach of fiduciary duty, equitable subordination (based upon the settlement agreement between the Member-Owners and the Banks), and he sought to pierce the corporate veil by alleging that the Member-Owners were the "alter-ego" of ECI. The Trustee also brought seven separate preference lawsuits against the Banks and Member-Owners, seeking recovery of $17 million from the Banks and $50 million from the Member-Owners.
At the time of the settlement, the Trustee was holding $29 million which had been recovered in another settlement. The Banks asserted secured claims of at least $89 million (and depending upon how the interest would be calculated, the secured claim could total $158 million) against this $29 million. Thus, in order to make a distribution to the general creditors, the Trustee either had to defeat the Banks' liens, recover sufficient funds to satisfy them, or settle. The Trustee asked his chief counsel, Ronald Barliant (who became a Bankruptcy Judge in 1988), to evaluate the likely outcome of the litigation against the Banks and Member-Owners. Barliant found that the Trustee was likely to prevail on the promissory note claim and had a 40% chance of prevailing on the MSA claim, under certain circumstances. The Trustee however, had only a slight chance of prevailing on the MPPA claim, the alter ego claim, the equitable subordination claim, and the preference claims. Barliant concluded that "the single most likely result" if the case were litigated was that the Banks' secured claims "would swallow up everything" in the estate, thus preventing a distribution to general creditors.
On the basis of Barliant's assessment, the Trustee negotiated the Settlement Agreement at issue on this appeal with the Banks and the Member-Owners. The Trustee agreed to dismiss the eight lawsuits brought against the Banks and Member-Owners. Out of the $29 million presently held by the estate, the Trustee will pay $9 million to the Banks and Member-Owners. In exchange, the Banks agreed to release all claims to the remaining $20 million held by the ECI estate. In addition, they will waive all claims to future recoveries by the Trustee, including the recoveries in preference cases in which the Trustee is seeking over $90 million. The Settlement Agreement includes three other important provisions. It resolves the "Permian Litigation," Energy Cooperative Inc., et al. v. Permian Corp., et al., No. 81 A 2075, which involves the disposition of ECI's inventory. Second, it triggers the agreement of Atlantic Richfield Company to subordinate $45 million of its $50 million claim until there has been a 25% distribution to unsecured creditors. Third, the Settlement Agreement includes a provision conditioning the settlement upon the entry of an injunction prohibiting all creditors and preference defendants from asserting claims against the Member-Owners which were found by the court to be the exclusive property of the ECI estate.
On January 28, 1988, the Trustee presented a motion to the district court seeking approval of the Settlement Agreement. The court scheduled a hearing on the motion for March 30th and sent notice of the proposed settlement to all creditors, preference defendants and parties in interest. The Settlement Agreement was endorsed by the Official Creditors Committee, which had been elected pursuant to 11 U.S.C. Sec. 705. The...
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