In re Chateaugay Corp.
| Decision Date | 09 June 1993 |
| Docket Number | 92 Civ. 6010 (JES) and 92 Civ. 6011 (JES).,92 Civ. 2027 (JES),No. 89 Civ. 6687 (JES),89 Civ. 6687 (JES) |
| Citation | 156 BR 391 |
| Parties | In re CHATEAUGAY CORPORATION, Reomar, Inc., The LTV Corporation, et al., Debtors. In re LTV STEEL COMPANY, INC., Debtor. In re LTV STEEL TUBULAR PRODUCTS COMPANY, Debtor. FRITO-LAY, INC., FL Holding, Inc. and Ainwick Corporation, Appellants and Cross-Appellees, v. The LTV CORPORATION, LTV Steel Company, Inc., LTV Steel Tubular Products Company, Appellees and Cross-Appellants. |
| Court | U.S. District Court — Southern District of New York |
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Friedman, Wang & Bleiberg, P.C., New York City, for appellants and cross-appellees (Arthur S. Friedman, Susan J. Schwartz, and Laurie R. Josephs, of counsel).
Shea & Gould, New York City, for appellants and cross-appellees (Martin I. Shelton, of counsel).
Davis, Polk & Wardwell, New York City, for appellees and cross-appellants (Guy Miller Struve, Bradley J. Butwin, Linda A. Ginsberg, and Karen V. Walker, of counsel).
Kaye, Scholer, Fierman, Hays & Handler, New York City, for appellees and cross-appellants.
Appellants and cross-appellees Frito-Lay, Inc., FL Holding, Inc. and Ainwick Corporation (collectively "Frito-Lay") and appellees and cross-appellants The LTV Corporation, for and on behalf of itself and the other debtors and debtors-in-possession herein (collectively "LTV" or "debtors") appeal from three orders of the United States Bankruptcy Court for the Southern District of New York (Lifland, Ch.J.) dated April 21, 1992 (the "Scheduling Order"), and dated July 1, 1992 and amended on July 2, 1992 which determined the amount of Frito-Lay's liquidated claims pursuant to section 502(b) of the Bankruptcy Code and estimated the allowed amount of Frito-Lay's contingent and unliquidated claims pursuant to section 502(c) of the Code (the "Final Order"). Frito-Lay also appeals from an earlier order entered by Judge Lifland dated February 18, 1992 which held, inter alia, that Frito-Lay's tort and quasi-contract claims were defective as a matter of law. For the reasons that follow, the orders appealed from are affirmed.
In 1981 and 1982, LTV and Frito-Lay entered into twenty-five tax benefit transfer agreements ("TBT Agreements") whereby LTV transferred to Frito-Lay the tax benefits associated with certain property to take advantage of provisions of the now repealed safe harbor leasing provisions of the Economic Recovery Tax Act of 1981 ("ERTA"), Pub.L. No. 97-34, 95 Stat. 172, repealed by, Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), Pub.L. No. 97-248, 96 Stat. 324, and temporary treasury regulations promulgated thereunder. See Temp.Treas.Reg. § 5c.168(f)(8)-1 to -8 (1992).
Under the TBT Agreements,2 also known as safe harbor leases, LTV Steel's predecessors, Republic Steel Company ("Republic") and Jones & Laughlin Steel, Inc. ("J & L"), agreed to transfer the tax benefits from $520 million worth of LTV assets sold at their cost basis to Frito-Lay which leased them back for LTV's continued use. For a one-time cash payment and a promise to make regular installment payments, Frito-Lay received an exactly offsetting rental payment from LTV plus the property's tax benefits, i.e., accelerated cost recovery system ("ACRS") deductions for the property's depreciation, an investment tax credit, and an energy tax credit. Over the life of the arrangement, LTV retained actual ownership rights in the property while Frito-Lay was owner of the property for tax purposes only.
The TBT Agreements specifically deal with the probability that Frito-Lay's tax benefits might be lost because of a disqualifying event, i.e., that the transferred assets would be disqualified from safe harbor treatment under ERTA. Where that occurred, the assets were deemed to be sold by the tax lessor (Frito-Lay) to the tax lessee (LTV), resulting, in this case, in Frito-Lay's recognition of income in an amount equal to the principal outstanding on its installment payment obligation. See Temp.Treas.Reg. § 5c.168(f)(8)-8(d). The TBT Agreements also imposed an indemnity obligation on LTV with respect to tax costs incurred by Frito-Lay as a consequence of a disqualifying event.
On July 17, 1986, LTV filed the first of its voluntary petitions under Chapter 11 of the Bankruptcy Code, subsequent to which, in response to a downturn in the fortunes of the domestic steel industry, it "retired"3 certain TBT assets at several facilities in 1987. Although the applicable temporary treasury regulation reserved on the question as to whether those retirements of unprofitable TBT assets during that period of restructuring were disqualifying events, see Temp.Treas.Reg. § 5c.168(f)(8)-8(b)(9),4 LTV nevertheless applied the tax deductions associated with that retired property to reduce its 1987 tax liability. Frito-Lay, believing that it could not also use those tax benefits, paid approximately $14 million in taxes based upon the retirement of those assets. See Affidavit of Mark Kreger sworn to June 9, 1992, ¶ 15. Frito-Lay then filed claims in the bankruptcy court against LTV for indemnification under the TBT Agreements and claims sounding in tort and quasi-contract for improper appropriation of tax benefits belonging to Frito-Lay.
Frito-Lay sought an administrative priority for that post-petition conduct, claiming that LTV's post-petition decision to appropriate the aforesaid tax benefits entitled them to that priority. The debtors filed objections to Frito-Lay's proofs of claims, and moved for partial summary judgment seeking a determination that the TBT Agreements relating to assets at LTV Steel's Buffalo, New York facility did not constitute executory contracts or unexpired leases under section 365 of the Bankruptcy Code and that Frito-Lay's indemnity loss claims were pre-petition general unsecured claims not entitled to an administrative priority under sections 503 and 507 of the Bankruptcy Code. On June 29, 1989, the bankruptcy court granted that motion. See In re Chateaugay Corp., 102 B.R. 335 (Bankr.S.D.N.Y.1989) (hereinafter "Chateaugay I"), aff'd, No. 89 Civ. 6687 (S.D.N.Y. Mar. 29, 1990).
By Order dated March 29, 1990, for reasons expressed on the record on March 23, 1990, this Court affirmed that decision of the bankruptcy court.5 The debtors subsequently moved for summary judgment seeking a determination that that holding applied to the rest of the TBT Agreements. LTV also moved for summary judgment and Frito-Lay cross-moved for partial summary judgment with respect to the issue of the debtors's liability on Frito-Lay's tort and quasi-contract claims. By order dated February 18, 1992, following a decision is sued on January 16, 1992 as amended by an errata notice dated February 14, 1992,6 the bankruptcy court granted LTV's motion for summary judgment and denied Frito-Lay's cross-motion for partial summary judgment, ruling that the tort and quasi-contract claims were insufficient as a matter of law. See In re Chateaugay Corp., 136 B.R. 79 (Bankr.S.D.N.Y.1992) (hereinafter "Chateaugay II"). Frito-Lay appealed that decision, and this Court, in the interests of judicial efficiency, deferred any ruling on the merits of that appeal until after the bankruptcy court had issued its final order.
Thereafter, the debtors moved for a hearing to determine the allowed amount of Frito-Lay's fixed claims and to estimate their contingent, unliquidated claims. See, e.g., In re Baldwin-United Corp., 55 B.R. 885, 896-902 (Bankr.S.D.Ohio 1985). The bankruptcy court granted that motion and, in its Scheduling Order, scheduled limited discovery for the purpose of that hearing. See Bankruptcy Court Order dated April 21, 1992.
After that hearing, the bankruptcy court entered its Final Order, dated July 2, 1992, in accordance with an oral opinion given on June 17, 1992, which established the allowed amount of Frito-Lay's fixed claims, i.e., claims based either on the ab initio failure of certain TBT assets to qualify for anticipated energy or other tax credits from the time of acquisition (the "ab initio claims"), or on other undisputed disqualifications. The bankruptcy court also estimated Frito-Lay's contingent claims, i.e., claims based on either past or future retirements of TBT assets which have yet to be finally determined to be disqualifying events as required by the TBT Agreements. The bankruptcy court estimated the contingent claims at 80% because of the strong probability that they would be so determined. The bankruptcy court also declined to award Frito-Lay post-petition interest, and declared that Frito-Lay is not entitled to a gross-up for taxes owed on indemnification payments received on its ab initio claims. See Final Order, Ex. C at 92-101. In total, the bankruptcy court allowed $39,625,284 of Frito-Lay's claim.7 See Final Order at 3-4 & Ex. D. Frito-Lay appeals these specific determinations as well as certain discovery rulings.
LTV cross-appeals from the Final Order. They argue (1) that the bankruptcy court should have estimated at 20%, not 80%, the likelihood that LTV's retirements of TBT assets will be finally determined to be disqualifying events, (2) that the TBT Agreements do not require LTV to indemnify Frito-Lay for state and local taxes owed as a result of receiving indemnity payments, and (3) that the TBT Agreements require that stipulated indemnity loss schedules be used wherever Frito-Lay suffered a loss of all tax benefits remaining as of the time of a complete disqualification. The bankruptcy court held that those schedules should only be used where Frito-Lay's loss resulted from an ab initio failure of a TBT asset to qualify for all tax benefits.
In this memorandum opinion, the Court reiterates its ruling on Frito-Lay's prior appeal of the bankruptcy court's June 29, 1989 order, and addresses the issues raised by the parties's appeals...
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