In re Best Products Co., Inc.

• Decision Date: 20 January 1995
• Docket Number: No. 91 B 10048 (TLB) to 91 B 10053 (TLB) and 94 CIV 5388 (AGS).,91 B 10048 (TLB) to 91 B 10053 (TLB) and 94 CIV 5388 (AGS).
• Citation: 177 BR 791
• Parties: In re BEST PRODUCTS CO., INC., et al., Debtors. RESOLUTION TRUST CORPORATION, as receiver for Farwest Savings and Loan Association and ABQ Federal Savings Bank, Appellant, v. BEST PRODUCTS CO., INC., et al., Appellees.
• Court: U.S. District Court — Southern District of New York

177 B.R. 791 (1995)

In re BEST PRODUCTS CO., INC., et al., Debtors.

RESOLUTION TRUST CORPORATION, as receiver for Farwest Savings and Loan Association and ABQ Federal Savings Bank, Appellant, v. BEST PRODUCTS CO., INC., et al., Appellees.

Nos. 91 B 10048 (TLB) to 91 B 10053 (TLB) and 94 CIV 5388 (AGS).

United States District Court, S.D. New York.

January 20, 1995.

Kronish, Lieb, Weiner & Hellman (Richard Lieb, Tara Hannon, of counsel), New York City, Resolution Trust Corp. (Joseph A. Guzinski, of counsel), Washington, DC, for appellant Resolution Trust Corp.

Weil, Gotshal & Manges (Harvey R. Miller, Marc D. Puntus, of counsel), New York City, for appellees/debtors.

Simpson Thacher & Bartlett (Robert A. Bourque, Lillian E. Kraemer, Melvyn L. Cantor, Frederic M. Brooks, of counsel), New York City, for appellees Bank Group.

Wachtell, Lipton, Rosen & Katz (Chaim J. Fortgang, Eric M. Roth, of counsel), New York City, for appellee Chemical Bank.

SCHWARTZ, District Judge:

The Resolution Trust Corporation (the "RTC") appeals from an order of the United States Bankruptcy Court for the Southern District of New York (Brozman, B.J.) ("the Bankruptcy Court") dated May 31, 1994 and docketed June 3, 1994 (the "Confirmation Order") confirming the Appellees'-Debtors' Joint Plan of Reorganization dated January 14, 1994 under chapter 11 of title 11 of the United States Code (the "Plan" and the "Bankruptcy Code", respectively). The Confirmation Order followed a comprehensive written decision in which the Bankruptcy Court, among other things, overruled the RTC's objections to confirmation of the Plan. See In re Best Prods. Co., 168 B.R. 35 (Bankr.S.D.N.Y.1994) (the "Bankruptcy Court Decision"). The Confirmation Order was settled pursuant to the direction in the Bankruptcy Court Decision to "SETTLE ORDER consistent with this decision" (id. at 73) and the Bankruptcy Court Decision is incorporated into the Confirmation Order by reference. Confirmation Order at 3-4. The Appellees-Debtors and the Appellees-Bank Group¹ (collectively, the "Appellees") have moved to dismiss the RTC's appeal on the grounds that the appeal is moot since the RTC failed to seek a stay of the Confirmation Order, the Plan has been consummated and this Court cannot effectively or equitably fashion a remedy. For the reasons set forth below, the motion to dismiss is granted.

BACKGROUND

Certain background facts material to this decision are set forth in the Bankruptcy Court Decision; familiarity with the Bankruptcy Court Decision is assumed. The following facts are relevant to this Court's decision and are referred to as background. Unless otherwise indicated, these facts are uncontroverted.

The Parties and the Chapter 11 Proceedings

On January 4, 1991 (the "Commencement Date"), the Appellees-Debtors — Best Products Co., Inc. (a Virginia corporation) and its affiliates, BAC Holdings Group, Inc., Best Ashland, Inc., Best California, Inc., Best Products Co., Inc., (a New York corporation) and First Land & Development, Inc., (collectively, the "Debtors") — each commenced a case under the Bankruptcy Code. The chapter 11 cases were referred to the Honorable Tina L. Brozman, United States Bankruptcy Judge, and were procedurally consolidated and jointly administered pursuant to an order of the Bankruptcy Court. After the Commencement Date, the Debtors continued to operate their businesses and manage their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code.

The Debtors' chapter 11 petitions were filed in the wake of a failed leveraged buyout ("LBO") which was commenced in late 1988 and consummated in early 1989. In connection with the LBO, the members of the Bank Group provided $622 million of senior financing that was partially secured but largely unsecured. Under the Plan, the claims of the Bank Group are allowed as unsecured claims in the amount of $322,653,717.

The RTC is the receiver for two failed depository institutions, FarWest Savings & Loan Association ("FarWest") and ABQ Federal Savings Bank ("ABQ"). FarWest, ABQ and other lenders provided junior financing pursuant to note purchase agreements which expressly provided that any payments on their notes would be "subordinate and subject in right of payment to the prior payment in full" of the Bank Group's senior indebtedness. The RTC, individually and as agents on behalf of FarWest and ABQ, filed separate proofs of claims against each of the Debtors based on the notes in the amount of approximately $34,000,000.

On December 29, 1992, the Debtors commenced adversary proceedings against the Bank Group, the RTC and numerous other participants in the LBO.² The Debtors' principal complaint challenged the loans made by the Bank Group, the RTC's predecessors and others as fraudulent conveyances pursuant to section 544(b) of the Bankruptcy Code (the "LBO Action"). The Debtors also sought to void certain payments to the Bank Group, the RTC and others as voidable preferences under section 547 of the Bankruptcy Code.³

The Plan and the Objections to the Plan

In January 1994, the Debtors proposed the Plan and filed a disclosure statement under section 1125 of the Bankruptcy Code with respect to the Plan (the "Disclosure Statement"). The Disclosure Statement was approved by order of the Bankruptcy Court dated January 14, 1994 and a confirmation hearing was scheduled for March 16, 1994 on the Plan.

As detailed in the Bankruptcy Court Decision, the Plan — the fifth proposed plan of reorganization filed — was the product of years of arduous arm's-length negotiations between the Debtors and various creditor constituencies. The settlement of the LBO Action (including as against the RTC), as well as the settlement of the preference action against the Bank Group (the "Bank Preference Action"), are contained in the Plan (collectively, the "Settlement"). In approving the Settlement as "fair and equitable and well within the range of reasonableness", the Bankruptcy Court considered, among other things:

the issues, both legal and factual, raised by the proponents and opponents of the settlement; the impediments to a recovery by Best in the LBO Action; the cost of further litigation both as a dollar figure and as a distraction to a company either remaining in or just emerging from chapter 11; the proportion of the creditors who have voted in favor of the plan; the relative benefits to be received by the estate from the settlement; the nature and breadth of the releases to be issued; and the circumstances surrounding the negotiation of the settlement and plan.

In re Best Prods. Co., 168 B.R. at 47-64.⁴ Significantly, the Bankruptcy Court unambiguously found that the Settlement was one of the "cornerstones" of the Plan. Id. at 60, 72. This finding is clearly supported by the Disclosure Statement and the Plan.

Under the Plan and the Settlement, in exchange for a dismissal with prejudice of the Debtors' adversary proceedings against the Bank Group, the Bank Group agreed to release its security interests in certain of the Debtors' property and to permit the reallocation to the Debtors' general unsecured creditors of $23 million dollars in cash and $8 million dollars in equity.⁵ The Bankruptcy Court observed:

If the settlements of the LBO Action and the Bank Preference Action are approved, the Banks, in exchange for the Best\'s agreement not to challenge their claim of roughly $322.7 million, will release liens and security interests granted in connection with the merger financing and the September 1990, refinancing (the latter being the subject of the Bank Preference Action). In addition, the Banks have agreed to release any claims based upon guarantees made by subsidiaries of Best. Lastly, the Banks have agreed to shift to other classes distributions of roughly $23 million in cash and $8 million in equity. The Banks are not releasing or waiving the benefits of any contractual subordination held by them as against the Objectants which include the RTC.

In re Best Prods. Co., 168 B.R. at 47.

More specifically, the distributions to classes 6 (Mutual Life Insurance Company of New York), 13 (holders of industrial revenue bonds) and 14 (general unsecured creditors) "reflect the benefits realized by enforcement of the subordination provisions (which the Objectants oppose) as well as the proposed compromises and settlements" with the Bank Group and others. Id. at 48 (citations omitted). As the Bankruptcy Court explained:

the proposed LBO settlement allows Best to sweeten the distributions to class 13 (who hold industrial development bonds) by roughly 7.5% ($2.5 million), to the class 14 claimants (the general unsecured creditors) by over 12% ($42 million), . . . and to class 6 by 7.24% ($36 million). The source of these added distributions, as discussed above, is MetLife, which is foregoing 12.4% of its distribution ($10 million), and the Banks, which inter alia, are contributing roughly 10% of their distribution ($31.5 million).

Id. at 48 (citations omitted).

The Plan also enforces the subordination agreements among creditors pursuant to section 510 of the Bankruptcy Code by directing that cash and shares of new common stock of the reorganized Debtors otherwise distributable to subordinated claimants be distributed to the beneficiaries of the subordination agreements. As a consequence, the RTC, as the receiver for two subordinated creditors, did not receive any recovery under the Plan other than the with prejudice termination of the LBO Action that was brought against the RTC and other defendants.

Critically, the Bankruptcy Court found that the Bank Group would not have supported the Plan, which included the Settlement, unless the Plan provided for the enforcement of the subordination agreements. The Bankruptcy Court observed that, the Bank Group "adamantly refused to entertain any plan that would give a distribution to the subordinated creditors in variance with the...