Harper v. Oversight Comm. (In re Conco, Inc.)
| Decision Date | 28 April 2017 |
| Docket Number | No. 16-6166,16-6166 |
| Parties | IN RE: CONCO, INC., Debtor. Tom Harper ; Sandra Krumma; Peggy Sue Leake; Samuel Zane Leake; Jon Souder; Conco Acquirement, LLC; Delfasco LLC, Appellants, v. The Oversight Committee; Conco, Inc., Appellees. |
| Court | U.S. Court of Appeals — Sixth Circuit |
ARGUED: David S. Kaplan, KAPLAN & PARTNERS LLP, Louisville, Kentucky, for Appellants Harper, Krumma, Leake, and Souder. Cory J. Skolnick, FROST BROWN TODD LLC, Louisville, Kentucky, for Appellants Delfasco and Conco Acquirement. James R. Irving, BINGHAM GREENEBAUM DOLL LLP, Louisville, Kentucky, for Appellee Oversight Committee. Neil C. Bordy, SEILLER WATERMAN LLC, Louisville, Kentucky, for Appellee Conco, Inc. ON BRIEF: David S. Kaplan, Casey L. Hinkle, KAPLAN & PARTNERS LLP, Louisville, Kentucky, for Appellants Harper, Krumma, Leake, and Souder. Cory J. Skolnick, John S. Egan, Edward M. King, FROST BROWN TODD LLC, Louisville, Kentucky, Gilbert Backenroth, HAHN & HESSEN LLP, New York, New York, for Appellants Delfasco and Conco Acquirement. James R. Irving, John K. Bush, C.R. Bowles, Jr., BINGHAM GREENEBAUM DOLL LLP, Louisville, Kentucky, for Appellee Oversight Committee. Neil C. Bordy, Keith J. Larson, SEILLER WATERMAN LLC, Louisville, Kentucky, for Appellee Conco, Inc.
Before: DAUGHTREY, SUTTON, and DONALD, Circuit Judges.
This matter is before the court on appeal from a February 18, 2016 Memorandum Opinion and Order (the "February 18, 2016 Decision") of the United States Bankruptcy Court for the Western District of Kentucky ("Bankruptcy Court") in the Chapter 11 bankruptcy case In re Conco, Inc. , No. 12-34933-jal, 2016 WL 675549 (Bankr. W.D. Ky.). In that opinion and order, the Bankruptcy Court interpreted Conco Inc.'s Confirmed Plan to prohibit the sale of the ESOP-held Conco stock (the "Equity Security Interests" in the Debtor) from being sold or transferred through December 31, 2018, and enjoined any such sale until that time. The United States District Court for the Western District of Kentucky ("District Court") affirmed, finding that the Bankruptcy Court properly found that the Confirmed Plan prohibited the sale of the Equity Security Interests through December 31, 2018, and the Disclosure Statement containing identical language was adequate. Since the proper standard of review is abuse of discretion, and the Bankruptcy Court did not abuse its discretion, we AFFIRM the Bankruptcy Court's opinion and order.
Conco, Inc. ("Conco" or the "Debtor") manufactures containers used by the United States Armed Forces and contractors who provide ammunition to the United States Armed Forces. All of the stock of Conco is held by the Conco, Inc. Employee Stock Ownership Plan and Trust (the "ESOP"), a defined contribution employee benefit plan. Appellant-Participants are all former employees of the Conco who are participants in the ESOP (the "Appellant-Participants").
On November 5, 2012 (the "Petition Date"), Conco filed a petition for voluntary relief under title 11 of the United States Code. Shortly after the Petition Date, and throughout the course of the Chapter 11 proceedings, Delfasco, LLC, ("Delfasco" and together with the Appellant-Participants, the "Appellants") Conco's primary competitor, expressed interest in acquiring Conco's assets. These attempts proved to be unsuccessful. Conco's main customers, General Dynamics and the United States Department of the Army, opposed Delfasco's efforts to acquire control of Conco, with both customers declaring they would terminate their contracts with Conco in the event Delfasco was successful.
On September 3, 2013, Conco filed its initial plan of reorganization, which provided that the holders of Equity Security Interests (referred to in the plan as the "equity securities in the Debtor" and classified as Class 4 interests) would retain those interests, Conco's business would not be sold, and general unsecured creditors (the "UCC" or Class 3 creditors) would receive approximately sixteen cents on the dollar for their claims. The creditors committee, among others, objected to this plan. Conco proposed several more plans, each increasing the amount the Class 3 creditors would receive and all containing the same language regarding the Class 4 Equity Security Interest. After extensive arm's length negotiations with Conco, General Dynamics, and Delfasco, the UCC determined it was in the best interest of the creditor body to reject Delfasco's efforts to purchase control of Conco.
As a result of the parties' negotiations, the UCC agreed to support the Debtor's Third Amended Plan of Reorganization that provided both defined distributions and contingent distributions, which would be funded by the operation of the Conco's business, which was to continue through December 31, 2018. The UCC supported the Third Amended Plan because it would guarantee them a higher recovery than if Delfasco gained control of Conco.
On November 20, 2014 (the "Confirmation"), the Bankruptcy Court confirmed Conco's Third Amended Plan of Reorganization (the "Confirmed Plan") which provides Class 3 "(i) Defined Distributions—general unsecured claim holders approximately $4,848,391, which equates to approximately forty cents on the dollar for their claims; and (ii) Contingent Distributions representing each holder's pro rata share of fifty percent of Debtor's ‘annual net operating profit before depreciation’ over the amount projected by Debtor in the forecast years 2015 to 2018." Regarding the Equity Security Interests of the Debtor, the Confirmed Plan provides:
On the Effective Date, holders of equity securities in the Debtor shall retain their interests as in existence immediately prior to the Effective Date. Between Confirmation and the Effective Date, the ESOP shall be amended to provide that the Debtor may not contribute money or any other property to the ESOP, nor repurchase any employee-owned equity securities through December 31, 2018, to the extent allowed by applicable law.
Confirmed Plan, Art. V-Treatment of Claims and Interests, Class 4—Equity Security Interests [Bankr. DN 468-1] 9. The Confirmed Plan contains no other statements regarding the Equity Security Interests. The Third Amended Disclosure Statement (the "Disclosure Statement"), in the "Classes of Claims and Interests" section, contains the identical language quoted above. [Bankr. DN 389] 16. December 31, 2018, is when the last Defined Distributions are scheduled to be made and the last Contingent Distributions will be calculated. After Confirmation, Delfasco made offers to the ESOP Trustees and the Conco board of directors to purchase all of the Equity Security Interests. These offers were not accepted.
On July 1, 2015, Appellant-Participants filed a complaint against Conco, the Board of Directors of Conco, Inc., the ESOP, and the Conco ESOP Trustees (the "ERISA Litigation"). Appellant-Participants asserted two claims, one for a declaration that the Conco ESOP Trustees have breached their fiduciary duties under ERISA by not evaluating and responding to offers by Delfasco to purchase the Equity Security Interests (Count I), and one for injunctive relief to remove the ESOP Trustees and name one or more independent trustees (Count II) (together, the "Complaint").
Following a motion to transfer and refer the ERISA Litigation to the Bankruptcy Court, the issue of whether Conco's Confirmed Plan prohibits the sale of the Equity Security Interests, to anyone, before December 31, 2018, was raised. During oral argument on October 19, 2015, Conco contended that an Equity Security Interests sale to Delfasco would violate the terms of the Confirmed Plan because Delfasco's intent would be to close Conco. Thereafter, an oversight committee, which was acting as successor in interest to the UCC (the "Oversight Committee"), had the bankruptcy case reopened and on November 6, 2015, filed a motion to enforce the Confirmed Plan by prohibiting the sale of the Class 4 Equity Security Interests through December 31, 2018 ("Motion to Enforce"). On November 18, 2015, the ESOP Trustees filed a motion seeking clarification of the Confirmed Plan and a declaration of the rights therein ("Motion for Clarification"). Specifically, the ESOP Trustees sought "necessary guidance and a declaration from the Bankruptcy Court as to whether a sale of 100% of shares of ESOP-owned stock to Delfasco, or any third party, prior to completion of the Amended Plan in 2018, is consistent with and/or violates the Confirmation Order and Amended Plan." Def. ESOP-Trustes' Mot. For Clarification [Bankr. DN 516] 4. Delfasco filed an objection to both motions, Conco filed a response in support of the Motion to Enforce, and Appellant-Participants filed an objection and supplemental objection to the Motion to Enforce and the Motion for Clarification.
On February 18, 2016, the Bankruptcy Court ordered "that the holders of Class 4 Equity Security Interests of Conco, Inc. under the Debtor's Third Amended Plan of Reorganization are hereby enjoined from selling, transferring, or otherwise divesting themselves of the Equity Interests of Conco, Inc. until January 1, 2019" (the "February 18, 2016 Order"). Order [Bankr. DN 552.] The Bankruptcy Court found that the four corners of the Confirmed Plan, as well the UCC's abandonment of its objection under the absolute priority rule of 11 U.S.C. § 1129(b)1 to the ESOP's retention of the Equity Interest in Conco, evidenced an intent for the Equity Interests not to be sold through December 31, 2018. The Appellants filed a timely appeal to the District Court which affirmed the Bankruptcy Court's decision on July 7, 2016. The Appellants filed a timely appeal to this court on July 21, 2016.
The district court has original and exclusive jurisdiction over a bankruptcy case under 28 U.S.C. § 1334(a). The bankruptcy court, as a unit of the district court pursuant to 28 U.S.C. § 151, and by a standing...
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