In re Caldor Corp.

• Decision Date: 09 September 2002
• Docket Number: Docket No. 00-5044.
• Citation: 303 F.3d 161
• Parties: In re The CALDOR CORPORATION, Caldor, Inc. — CT, Caldor, Inc. — N.Y., Debtors. Term Loan Holder Committee, Appellant, v. Ozer Group, L.L.C., Gordon Brothers Retail Partners, L.L.C., Wind-Down Oversight Committee, Caldor, Inc. — N.Y., The Caldor Corporation, Caldor, Inc. — CT & SBCG Co., LLC, Appellees.
• Court: U.S. Court of Appeals — Second Circuit

303 F.3d 161

In re The CALDOR CORPORATION, Caldor, Inc. — CT, Caldor, Inc. — N.Y., Debtors Term Loan Holder Committee, Appellant, v. Ozer Group, L.L.C., Gordon Brothers Retail Partners, L.L.C., Wind-Down Oversight Committee, Caldor, Inc. — N.Y., The Caldor Corporation, Caldor, Inc. — CT & SBCG Co., LLC, Appellees.

Docket No. 00-5044.

United States Court of Appeals, Second Circuit.

Argued: January 23, 2001.

Decided: September 9, 2002.

Martin J. Bienenstock (Michele J. Meises, Weil, Gotshal & Manges LLP, New York, NY), for Appellant.

Stephen J. Shimshak (Allan J. Arffa, Curtis J. Weidler, Paul, Weiss, Rifkind, Wharton & Garrison, New York, NY), for Appellee.

Before: WALKER, Chief Judge, F.I. PARKER and KATZMANN Circuit Judges.

F.I. PARKER, Circuit Judge.

Term Loan Holder Committee ("TLHC") moved to intervene pursuant to 11 U.S.C. § 1109 and Federal Rule of Civil Procedure 24 in an adversary proceeding initiated by The Ozer Group, LLC, Gordon Brothers Retail Partners, LLC, and SBCG Co., LLC (collectively, the "Joint Liquidators") against debtors, The Caldor Corporation, Caldor, Inc. — CT, Caldor, Inc. — N.Y., et al. (collectively, "Caldor"). The United States Bankruptcy Court for the Southern District of New York (James L. Garrity, Jr., Bankr.Judge) denied TLHC's motion by order dated September 30, 1999, and the United States District Court for the Southern District of New York (Robert W. Sweet, Judge), affirmed the denial by order dated May 8, 2000.

On this appeal, TLHC contends that in reaching their decisions, the bankruptcy and district courts erroneously interpreted § 1109(b) of the Bankruptcy Code, which states that a party in interest "may raise and may appear and be heard on any issue in a case under this chapter." 11 U.S.C. § 1109(b). TLHC argues that this provision creates an unconditional statutory right for parties in interest to intervene in adversary proceedings that occur in connection with a Chapter 11 bankruptcy case. Because we find that the plain text of the statute indicates Congress intended to grant such a right, we reverse the lower courts' decisions and remand this case for further proceedings consistent with this opinion.

I. BACKGROUND

Caldor constituted one of the largest discount retailers in the Northeast-Mid-Atlantic Corridor, operating 145 stores in ten East Coast states. On September 18, 1995, Caldor filed for protection under Chapter 11 of the Bankruptcy Code. Pursuant to §§ 1107 and 1108 of the Bankruptcy Code, Caldor remained in possession and control of its businesses as a debtor in possession.

TLHC represents the holders of a term loan under a credit agreement dated October 21, 1993 ("Term Loan Holders") and the holders of a real estate loan under a credit agreement dated August 8, 1995 ("Real Estate Loan Holders"). At the time of Caldor's bankruptcy petition, the term loan, worth approximately $215 million, secured by a first lien against Caldor's inventory and proceeds, and the real estate loan, worth $37.1 million, was secured by real estate owned by Caldor. As part of Caldor's post-petition financing plan, the Term Loan Holders were granted a second lien against most of Caldor's real estate interests, and the Real Estate Loan Holders were granted a third lien against such interests. The Term Loan Holders and Real Estate Loan Holders both looked toward the proceeds from the sale of Caldor's inventory and leases to satisfy their secured claims.

After unsuccessfully attempting to reorganize, Caldor decided in early 1999 to wind down its operations and liquidate its assets. By a January 22, 1999 order, the bankruptcy court approved Caldor's wind-down decision.

Pursuant to a settlement agreement among the Term Loan Holders, the Real Estate Loan Holders, and Caldor, approved by the bankruptcy court on February 8, 1999, the Term Loan Holders and the Real Estate Loan Holders were paid certain proceeds of their collateral and were granted, and still hold, allowed administrative claims aggregating $20 million.

As part of its wind-down, Caldor decided to sell substantially all of its inventory in the remaining stores (the "Merchandise"). Caldor solicited bids for the right to purchase the inventory and chose to sell its Merchandise to the Joint Liquidators, who had formed a joint venture. The Joint Liquidators and Caldor negotiated a Purchase and License Agreement (the "Purchase Agreement"), executed on or about February 1, 1999. By application dated February 2, 1999, (the "Application"), Caldor sought an order from the bankruptcy court approving the Purchase Agreement. TLHC filed a limited objection to the break-up fee requested in the Application and participated at the hearing to approve the Application on February 11, 1999. After the hearing and competitive bidding in open court, the bankruptcy court approved an amended version of the Purchase Agreement by an order dated February 11, 1999 (the "Approval Order").

Pursuant to the Purchase Agreement and the Approval Order, the Joint Liquidators transferred over $223 million to Caldor and conducted going-out-of-business sales at Caldor's stores, selling all of Caldor's remaining inventory to the public. The going-out-of-business sales commenced on February 12, 1999 and were completed in mid-March.

Thereafter, Caldor allegedly refused to honor certain purchase price adjustment provisions of the Purchase Agreement. Based on this refusal, the Joint Liquidators initiated this Adversary Proceeding against Caldor on July 19, 1999, alleging breach of contract and related claims, and seeking over $26 million in damages. Caldor answered the Joint Liquidators' complaint by stating various affirmative defenses and counterclaims for, among other things, reformation of the contract based on mutual mistake and fraud in the inducement.

On August 19, 1999, TLHC moved to intervene in the Adversary Proceeding under 11 U.S.C. § 1109(b) and Federal Rule of Civil Procedure ("FRCP") 24.¹ TLHC sought intervention as a matter of right under FRCP 24(a), arguing that § 1109(b) conferred on it a right to appear and be heard. TLHC asserted furthermore that its constituents' administrative claim for $20 million constituted the largest single administrative claim in Caldor's Chapter 11 case, and since Caldor's estates were administratively insolvent, the outcome of the Joint Liquidators' Adversary Proceeding seeking $26 million from Caldor would "necessarily impact upon the amount of property of the estates available for the benefit of creditors." TLHC Mot. to Intervene, Aug. 19, 1999 ¶¶ 14-15. In light of its pecuniary interest in the outcome of the Adversary Proceeding, TLHC argued that it was the "true party in interest in Caldor's [C]hapter 11 case." Id. ¶ 15. TLHC also sought permissive intervention under FRCP 24(b).

The Joint Liquidators opposed TLHC's motion, denying there were any grounds for TLHC to intervene as of right or permissively. In particular the Joint Liquidators argued that § 1109(b) provided a party in interest with a right to be heard in a case only and that it stated nothing about intervention in an adversary proceeding.

Caldor, for its part, urged the bankruptcy court to grant TLHC's motion, acknowledging that it had "solicited and encouraged the active participation of [TLHC] in this adversary proceeding." Caldor Corp. Resp. to TLHC Mot. to Intervene, Sept. 21, 1999, ¶ 7.

On September 30, 1999, the bankruptcy court denied TLHC's motion and read its opinion into the record. Noting that the Joint Liquidators did not dispute that TLHC was a party in interest under § 1109(b), the bankruptcy court acknowledged the split in authority over whether § 1109(b) applies to a Chapter 11 case only or to adversary proceedings commenced in such a case as well. The bankruptcy court cited Official Unsecured Creditors' Committee v. Michaels (In re Marin Motor Oil, Inc.), 689 F.2d 445 (3d Cir.1982) cert. denied, 459 U.S. 1206, 103 S.Ct. 1196, 75 L.Ed.2d 440 (1983) and Sarah R. Neuman Foundation, Inc. v. Garrity (In re Neuman), 124 B.R. 155 (S.D.N.Y.1991) for the proposition that § 1109(b) grants a right to intervene in adversary proceedings, and Fuel Oil Supply and Terminaling v. Gulf Oil Corp., 762 F.2d 1283 (5th Cir.1985) and 995 Fifth Avenue Associates, L.P. v. New York State Department of Taxation and Finance (In re 995 Fifth Avenue Associates, L.P.), 157 B.R. 942 (S.D.N.Y.1993) for the opposing view that § 1109(b) is applicable only to the Chapter 11 case. The bankruptcy court concluded that the latter cases "state the better view" and held that § 1109(b) therefore provided no basis for TLHC to intervene under FRCP 24(a)(1).

With regard to FRCP 24(a)(2), the bankruptcy court reasoned that Caldor, as a debtor-in-possession, was a fiduciary of its creditors and that in liquidating its assets, Caldor was obligated to act in the best interests of its creditors. The court found that TLHC failed to allege or adduce any evidence that Caldor would not adequately represent TLHC's interests in the Adversary Proceeding and rejected TLHC's bid to intervene under FRCP 24(a)(2). The bankruptcy court also denied TLHC permission to intervene under FRCP 24(b), concluding that TLHC's interest in maximizing its recovery in Caldor's administratively insolvent case was not a claim or defense within the meaning of FRCP 24(b)(2).

TLHC appealed, and the district court affirmed the bankruptcy court's decision in Term Loan Holder Comm. v. Ozer Group, LLC (In re Caldor, Inc. — N.Y.), No. 95 B 44080(JLG), 2000 WL 546465 (S.D.N.Y. May 3, 2000). The district court reviewed the cases identified by the bankruptcy court on the application of § 1109(b) to adversary proceedings and agreed with the bankruptcy court that "Fuel Oil and 995 Fifth Avenue provide[d] slightly more persuasive reasoning" than Marin and Neuman. Id. at *4. The district court explained:

As those decisions point out, "legislative and judicial signposts demonstrate that `Congress did not...