Ground Improvement Techs., Inc. v. Plan Comm. (In re Washington Grp. Int'l, Inc.)

• Decision Date: 29 September 2011
• Docket Number: No. 3:10–cv–00785–ECR–RAM.BAP No. NV–10–1481.,3:10–cv–00785–ECR–RAM.BAP No. NV–10–1481.
• Citation: 460 B.R. 280
• Parties: In re WASHINGTON GROUP INTERNATIONAL, INC., et al.Ground Improvement Techniques, Inc., Appellant, v. The Plan Committee, et al., Appellees.
• Court: U.S. District Court — District of Nevada

460 B.R. 280

In re WASHINGTON GROUP INTERNATIONAL, INC., et al.Ground Improvement Techniques, Inc., Appellant,

v.The Plan Committee, et al., Appellees.

No. 3:10–cv–00785–ECR–RAM.BAP No. NV–10–1481.

United States District Court, D. Nevada.

Sept. 29, 2011.

Frederick Huff, Law Offices of Frederick Huff, Denver, CO, Laury Miles Macauley, Lewis and Roca LLP, Reno, NV, Steven R. Schooley, The Schooley Law Firm, Orlando, FL, for Appellant.

Sylvia Harrison, Mcdonald Carano Wilson LLP, Amy N. Tirre, Law Office of Amy N. Tirre, Reno, NV, Todd J. Dressel, Winston & Strawn LLP, San Francisco, CA, for Appellees.

Order

EDWARD C. REED, District Judge.

This case is an appeal from the order of the bankruptcy court, docketed on August 4, 2010, which precluded Appellant from collecting post-judgment interest on a judgment which the United States Department of Energy (“DOE”) is obligated to pay. The question presented by the appeal is whether the bankruptcy court erred in finding that 11 U.S.C. § 502(b)(2) prevents Appellant from collecting post-petition interest from the DOE, a non-debtor.

I. Factual and Procedural Background

In 1983, the DOE hired Washington Group International, Inc.'s (“WGI”) predecessor, Morrison–Knudsen Corporation (“MK”), to manage a project for the cleanup of radioactive mill tailings. (Appellant's Appendix (“AA”) 846.) MK subcontracted with Ground Improvement Techniques, Inc. (“GIT” or Appellant) to clean up the Slick Rock, Colorado site. ( Id.) The project encountered problems, and in September 1995, MK terminated the subcontract and sued GIT for damages in the District of Colorado. ( Id.) GIT counterclaimed for wrongful termination. ( Id.) The case went to trial in November 1996, and the jury found in favor of GIT for wrongful termination and awarded GIT $5.6 million. (AA 847.) MK appealed, and the Tenth Circuit Court of Appeals affirmed the ruling on liability, but remanded the matter for a new trial on damages. (AA 874.)

On May 14, 2001, WGI and other related entities filed petitions under Chapter 11, Title 11 of the United States Code in the United States Bankruptcy Court for the District of Nevada, Reno Division (Case No. BK–N–01–31627). The second trial on damages was stayed by the bankruptcy filing. On August 24, 2001, GIT moved for relief from the automatic stay to allow a retrial on the issue of damages, contending that “any damages shall be paid directly from credit and/or property of the [DOE] and not from property of the Debtor's bankruptcy estate.” (AA 899–906.) The bankruptcy court granted GIT's request for relief from the automatic stay for a retrial on damages. (AA 909–916.)

By December 21, 2001, WGI's Second Amended Joint Plan of Reorganization (“the Plan”) was confirmed. (AA 71.) The Order confirming the Plan provided, inter alia, that “[n]otwithstanding anything in the Plan or this Order to the contrary, Ground Improvement Techniques, Inc. may continue its litigation to final judgment and final confirmation of the Plan will not affect the rights of Ground Improvement Techniques, Inc. other than the statutory discharge granted to the Debtors.” (AA 105.)

At the retrial in May 2006, the jury awarded GIT over $15 million in damages. (AA 882.) GIT collected approximately $7.8 million against the supersedeas surety. (Appellant's Opening Br. at 10(# 16).) A Second Modified Amended Judgment was rendered adjudicating $9,842,711.00 in yet unsatisfied principal plus postjudgment interest (from August 16, 2006) in favor of GIT. (AA 977–981.)

In May 2010, WGI's Plan Committee asked the bankruptcy court to direct GIT and reorganized WGI to first seek collection from the DOE for any principal amounts that could also be recoverable against the Plan Committee's Creditor's Trust. (AA 814.) GIT joined in the motion and sought authority to collect directly against the DOE the full amount of principal, but objected to the extent that the Plan Committee requested that GIT should not be allowed to collect interest on its judgment. (AA 960.) The bankruptcy court granted the Plan Committee's motion and adopted GIT's joinder relief in part, but limited GIT's direct collection against the DOE to the principal judgment amount of $9,842,711.83. (AA 1380.) Specifically, the bankruptcy court precluded GIT from collecting the award of accruing interest from the DOE. ( Id.)

On August 4, 2010, the bankruptcy court mandated certification and collection by GIT of the principal sum of GIT's judgment against the DOE. (AA 1377, 1385.) GIT is authorized to certify, prosecute, and directly collect the principal judgment award against the DOE, but not the accruing interest. (AA 1383, 1387.)

On August 17, 2010, GIT filed a Motion for Reconsideration (AA 1390) requesting that the bankruptcy court reconsider its ruling that GIT may not collect post-judgment interest from the DOE. The bankruptcy court denied GIT's motion on November 15, 2010. (AA 1563.) GIT appealed.

On December 17, 2010, the appeal was transferred to this Court by election of a party to the appeal (# 1). On February 1, 2011, Appellant filed its Opening Brief (# 16). On February 22, 2011, Appellees filed their Answering Brief (# 20). On March 8, 2011, Appellant filed its Reply Brief (# 21). On the same date, Appellant filed its Motion for Hearing (# 22). A hearing on the appeal was held on September 26, 2011.

II. Jurisdiction

United States District Courts have jurisdiction to hear appeals from “final judgments, orders, and decrees” of the bankruptcy court pursuant to 28 U.S.C. § 158(a)(1), as well as certain interlocutory orders described in 28 U.S.C. § 158(a)(2). A party may also, “with leave of the court,” appeal from other interlocutory orders and decrees pursuant to 28 U.S.C. § 158(a)(3). See In re City of Desert Hot Springs, 339 F.3d 782, 787 (9th Cir.2003) (noting that the district court must hear appeals from final decisions of the bankruptcy courts, but it is within the discretion of the district court to hear appeals of interlocutory orders).

Here, the bankruptcy court's order constitutes a final order within the meaning of 28 U.S.C. § 158(a)(1) because it represents the bankruptcy court's final resolution of the parties' rights with regard to Appellant's claim for post-petition interest. See id. at 788 (describing the Ninth Circuit's “ ‘pragmatic’ approach to deciding whether orders in bankruptcy cases are final, ‘recognizing that certain proceedings in a bankruptcy case are so distinct and conclusive either to the rights of individual parties or the ultimate outcome of the case that final decisions as to them should be appealable as of right.’ ”) (quoting In re Mason, 709 F.2d 1313, 1317 (9th Cir.1983)). As such, we have jurisdiction over the appeal pursuant to section 158(a).

III. Standard of Review

We review the bankruptcy court's application of the Bankruptcy Code to the Plan de novo.¹ See Temecula v. LPM Corp. (In re LPM Corp.), 300 F.3d 1134, 1136 (9th Cir.2002).

IV. Discussion

Appellant asserts that the bankruptcy court incorrectly applied 11 U.S.C. § 502(b)(2) in disallowing post-petition interest on its judgment against the DOE. Section 502(b)(2) provides that the court should disallow claims for unmatured interest. Appellant argues that because its claim for post-petition interest is against the DOE, and not the bankruptcy estate, § 502(b)(2) does not apply, and furthermore, the bankruptcy court violated 11 U.S.C. § 524(e) by discharging the DOE from its independent obligation owed to Appellant.

The bankruptcy court in this case relied on a previous decision by this Court. In Hathaway v. Raytheon Engineers & Constructors, Inc. (In re Washington Group International, Inc.), we ruled that tort claimants who had obtained a judgment against a Chapter 11 debtor in a personal injury suit could not collect post-petition interest from the debtor's insurer. 432 B.R. 282 (D.Nev.2010). While examining the present case, we reconsidered our analysis in Hathaway and have found reason to question our prior holding. ²

A. Policy Reasons Behind 11 U.S.C. § 502(b)

In 1964, the United States Supreme Court explained that “[t]he basic reasons for the rule denying post-petition interest as a claim against the bankruptcy estate are the avoidance of unfairness as between competing creditors and the avoidance of administrative inconvenience.” Bruning v. United States, 376 U.S. 358, 362, 84 S.Ct. 906, 11 L.Ed.2d 772 (1964). ³ The Supreme Court quoted American Iron & Steel Manufacturing Company v. Seaboard Air Line Railway to explain that the rule against post-petition interest “is not because the claims had lost their interest-bearing quality during that period, but is a necessary and enforced rule of distribution, due to the fact that ... assets are generally insufficient to pay debts in full.” Bruning, 376 U.S. at 362 n. 4, 84 S.Ct. 906 (quoting American Iron & Steel, 233 U.S. 261, 266, 34 S.Ct. 502, 58 L.Ed. 949 (1911)). The first reason behind disallowing postpetition interest, the concern about fairness among creditors, lies in the fact that some debts may carry a high rate of interest and some a low rate. Id. Allowing post-petition interest would then result in inequality in the payment of interest accrued during the delay incident to bankruptcy proceedings. Id. The Supreme Court also quoted American Iron & Steel for the proposition that interest should be paid if the estate proves solvent. Id. The Supreme Court's hint that a solvent estate should pay post-petition interest lends credence to the idea that the rule against post-petition interest is not in any way a judgment on the merits of post-petition interest, but merely a rule of distribution meant to maximize fairness in bankruptcy. See id. In accordance with the note in Bruning, lower courts have ruled that solvent estates should pay post-petition interest despite § 502(b)(2). See, e.g., In re Fast, 318 B.R. 183, 190 (Bankr.D.Colo.2004); see also United States v. Alaska National Bank of...