In re Chateaugay Corp.

• Decision Date: 29 June 1989
• Docket Number: Bankruptcy No. 86 B 11270(BRL)-86 B 11334(BRL),86 B 11402(BRL),86 B 11464(BRL).
• Citation: 102 BR 335
• 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.
• Court: U.S. Bankruptcy Court — Southern District of New York

102 B.R. 335 (1989)

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.

Bankruptcy Nos. 86 B 11270(BRL)-86 B 11334(BRL), 86 B 11402(BRL), 86 B 11464(BRL).

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

June 29, 1989.

Levin & Weintraub & Crames (Marc Abrams and Steven Fox, of counsel), Davis Polk & Wardwell (John D'Angelo, of counsel), New York City, for debtors.

Stroock & Stroock & Lavan, New York City, for Steel Creditors Committee (Mark Speiser, of counsel).

Wachtell, Lipton, Rosen & Katz, New York City, for Official Committee of Unsecured Steel Creditors (Harold S. Novikoff, of counsel).

Friedman, Wang & Bleiberg, P.C. (Arthur S. Friedman, of counsel), Shea & Gould (Martin Shelton, Michael Emrich and Glenn Siegel, of counsel), New York City, for Frito-Lay, Inc.

DECISION ON MOTION FOR SUMMARY JUDGMENT

BURTON R. LIFLAND, Chief Judge.

INTRODUCTION

The main issue presently before the Court appears to be a question of first impression as to whether Safe Harbor Leasing transactions or Tax Benefit Transfer Agreements are executory contracts or unexpired leases which are capable of being assumed or rejected under § 365 of the Bankruptcy Code. This unique form of transaction, although short-lived in terms of the Internal Revenue Code, has numerous consequences in a bankruptcy reorganization which perhaps were never contemplated at the time of its enactment.

BACKGROUND

On July 17, 1986 (the "Filing Date") and thereafter, the LTV Corporation ("LTV") and sixty-six of its affiliates (collectively, the "Debtors") filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code (the "Code"). Since the Filing Date, the Debtors have been continued in the management and operation of their respective businesses and properties as debtors-in-possession pursuant to §§ 1107 and 1108 of the Code. The Debtors' Chapter 11 cases have been consolidated for procedural purposes only and are being jointly administered pursuant to orders of this Court. No trustee or examiner has been appointed in any of the Debtors' Chapter 11 cases.

The Debtors are a large and highly complex group of companies principally engaged in the steel, aerospace/defense and energy products industries. LTV Steel is a major producer of hot and cold rolled sheets for the automotive and consumer durable goods markets and has been a major producer of high quality bar products¹. LTV Steel is one of the largest steelmakers in the United States as a result of LTV's June 29, 1984 acquisition of Republic, and the subsequent merger of J & L Steel, a former wholly-owned subsidiary of LTV, into Republic (the surviving corporation thereafter being renamed LTV Steel).

On January 23, 1989, the Debtors filed a motion objecting (the "Objection"), pursuant to §§ 501 and 502 of the Code and Bankruptcy Rule 3007, to the allowance of proofs of claim filed in these cases on November 25, 1987 by Ainwick Corp., Frito Lay, Inc. and FL Holding, Inc., (collectively, "Frito-Lay" and the "Frito-Lay Claims") in connection with various Safe Harbor Lease, or tax benefit transfer agreements ("TBT Agreements"), between Frito-Lay and certain of the Debtors (the "Frito-Lay TBT Agreements").²

The Frito-Lay Claims in question relate to various Frito-Lay TBT Agreements in which pursuant to certain of the agreements, LTV Steel agreed to indemnify Frito-Lay against certain losses, including losses resulting from the acceleration of taxable income as a consequence of certain triggering events described in the Frito-Lay Agreements (an "Indemnity Loss"). Debtors allege in their Statement pursuant to Local Bankruptcy Rule 13(h) ("Debtors' 13(h) Statement")³, that: (1) Between November 6, 1981 and December 23, 1982, LTV Steel entered into twenty-four separate TBT Agreements with Frito-Lay in connection with LTV Steel's acquisition of and investment in more than $520 million, adjusted basis (original cost), of capital equipment (the "TBT Assets") located at one or more of eighteen separate LTV Steel production facilities, including LTV Steel's Buffalo, New York facilities (the "Buffalo Works").⁴ (2) On January 17, 1984, pursuant to the terms of LTV Steel's collective bargaining agreement with the United Steel Workers of America, LTV Steel permanently terminated all steel production operations and activities at its Buffalo Works for certain labor-related purposes.⁵ (3) On November 18, 1987, LTV Steel permanently retired the Buffalo Works for all purposes, including steelmaking.⁶ (4) Beginning in December 1987, LTV Steel contracted for removal of asbestos, PCB transformers and other materials as the first step in the demolition of the Buffalo Works.⁷ The process of demolishing the physical facilities of the Buffalo Works began in July 1988. Demolition activities continued throughout the remainder of 1988 and are still in progress as of the date hereof. And (5) it is presently projected that demolition activities at the Buffalo Works will be completed prior to December 31, 1989.⁸ Debtors argue that whether or not the permanent retirement of the Buffalo Works and the resulting demolition activity described above triggered, or will result in the triggering of, fixed and liquidated Indemnity Losses under various Frito-Lay TBT Agreements, any such claims constitute general unsecured claims against the estate of LTV Steel.⁹

Thus, the Debtors seek pursuant to their Objection, for the entry of an order which determines that as a matter of law: (i) the Frito-Lay TBT Agreements do not constitute executory contracts or unexpired leases under § 365 of the Code, and (ii) the Frito-Lay Claims are pre-petition general unsecured claims that are not entitled to priority treatment under §§ 503 and 507 of the Code, as well as the entry of a scheduling order establishing procedures for the conduct of discovery in connection with the Objection and fixing a date and time for a hearing on the Objection at which the Court would liquidate and estimate the Frito Lay Claims. On March 20, 1989, the Debtors filed an amended objection which supersedes the prior Objection (the "Amended Objection"). The Amended Objection narrows the scope of the relief sought in the Objection by focusing only on the executory and administrative expense issues, and further objects to the newly filed 1989 Claims.

Pursuant to a separate motion, also dated March 20, 1989, Debtors move for partial summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure, (the "Federal Rules") made applicable herein pursuant to Bankruptcy Rule 9014, in connection with the Debtors' Amended Objection. Debtors seek a determination that, as a matter of law: (i) the Frito-Lay Agreements pertaining to assets located, or previously located, at the Buffalo Works do not constitute executory contracts or unexpired leases which are susceptible to assumption or rejection under § 365 of the Code, and (ii) any Indemnity Loss claim of Frito-Lay associated with Frito-Lay TBT Agreements relating to the Buffalo Works is a general unsecured claim which is not entitled to priority treatment under §§ 503 and 507 of the Code. Thus, Debtors allege that no genuine issue of material fact exists and therefore, pursuant to Federal Rule 56(a) they are entitled to a grant of partial summary judgment, as a matter of law.

In contrast, Frito-Lay filed its Opposition to the Debtors' Objection which seeks the entry of an order (a) pursuant to § 503(a) of the Code, and former § 168(f)(8) of Title 26 of the United States Code (the "Internal Revenue Code" or "IRC") as enacted by the Economic Recovery Tax Act of 1981 ("ERTA"), mandating payment by LTV of the administrative expenses it owes to Frito-Lay with respect to those alleged re-purchases of TBT property by LTV by reason of reported disqualifying events which have thus far led to accrued claims against the Debtors and (b) finding that Frito-Lay may require that future transfers of TBT property be made subject to the TBT Agreements. Additionally, in a yet to be filed Cross-Motion, Frito-Lay will allegedly seek an order (a) pursuant to § 503(a) of the Code, and former IRC § 168(f)(8) (as enacted by ERTA) mandating payment by LTV of the administrative expenses it owes to Frito-Lay by reason of those disqualifying events resulting in benefit to LTV and harm to Frito-Lay, which have thus far led to post-petition accrued claims against the Debtors; and (b) for such other and further relief which this Court may deem just and proper.

However, the only matters presently before the Court, (see, Transcript ("TR.") at 6-10, 65-7), are those narrow issues outlined in Debtors' Partial Summary Judgment Motion which are as follows:

I. Whether the Frito-Lay TBT Agreements are executory contracts or unexpired leases under § 365 of the Code.

A. Whether the Frito-Lay TBT Agreements are true "leases" for purposes of § 365 of the Code.

B. Whether the Frito-Lay TBT Agreements represent executory contracts for the purposes of § 365 of the Code.

II. Whether the Indemnity Loss claims being asserted by Frito-Lay, whether or not fixed or liquidated, are pre-petition general unsecured claims which are not entitled to priority.

III. Whether the Debtors are entitled to partial summary judgment in connection with the Objection and consistent with its Summary Judgment Motion.

TBT AGREEMENTS GENERALLY

In 1981 Congress, in a short-lived experiment with the tax laws, enacted the Economic Recovery Tax Act of 1981 ("ERTA"), Pu 97-34, 95 Stat. 172 (1982) including the now repealed provisions of Internal Revenue Code ("IRC") § 168(f)(8), which, together with a temporary regulation adopted thereunder (Temp.Treas.Reg. § 5c. 168(f)(8), et seq.), provided for TBT or safe harbor leasing transactions. The provisions of ERTA which provided for safe harbor leasing were repealed by the Tax Equity and Financial Responsibility Act of 1982 ...