In re Distrigas Corp.

• Decision Date: 26 September 1986
• Docket Number: Bankruptcy No. 85-1082-L.
• Citation: 66 BR 382
• Court: U.S. Bankruptcy Court — District of Massachusetts
• Parties: In re DISTRIGAS CORPORATION, Debtor.

66 B.R. 382 (1986)

In re DISTRIGAS CORPORATION, Debtor.

Bankruptcy No. 85-1082-L.

United States Bankruptcy Court, D. Massachusetts.

September 26, 1986.

Frederick G. Fisher, Jr., P.C., Judy A. O'Neill, Hale & Dorr, Boston, Mass., for debtor.

Ross A. Lewin, Deputy Atty. Gen., Trenton, N.J., for State of New Jersey Dept. of Environmental Protection.

Peter A. Fine, Choate, Hall & Stewart, Boston, Mass., (Local counsel), Donald L. Cuneo, Stuart D. Sender, Marjorie Miller, Shearman & Sterling, New York City, for Sonatrach.

MEMORANDUM DENYING CONFIRMATION

HAROLD LAVIEN, Chief Judge.

When the Cabot Corporation decided to enter the business of importing and distributing LNG, liquified natural gas, it did so by creating two wholly owned corporations. The debtor, Distrigas Corporation, whose only function was to hold the licensing authority to import the LNG from Algeria, which it carried out by way of a contract with Societe Nationale Pour la Recherche, la Production, le Transport, la Transformation et la Commercialisation des Hydrocarbures ("Sonatrach"). The debtor owned no facilities and had only one customer, its sister corporation, Distrigas of Massachusetts Corporation ("DOMAC"), to whom it "sold" (transferred might be a better word, since this was allegedly a no profit transaction) all of its LNG. In fact, it was Domac that had all of the storage, processing and distribution facilities and who held the contracts with the actual purchaser user.

Neither the parent, Cabot Corporation, nor the real operating sister corporation, DOMAC, have filed in bankruptcy. The debtor's only asset is $12,400,000 it was paid by DOMAC, plus interest for the last shipment of LNG which, in turn, is owed to Sonatrach, the debtor's supplier. The debtor also owns land in New Jersey which would have an estimated value of $2,500,000 if not for the toxic waste clean-up problem created by its previous owners. Probably another potential asset is the claim by the debtor against the previous owner for reimbursement of part or all of the clean-up costs and $161,256.73 owed by debtor's parent, the Cabot Corporation.

The schedules list five creditors other than Sonatrach, consisting of two law firms, totaling $11,893.77, part of which is estimated, a debt of $2,981.00 for consultation services, the State of New Jersey, and, peculiarly, an inter-company charge by DOMAC that, admittedly, disappears if operations continue. In any event, with over $12,000,000 in the till, it hardly seems that these claims have any real reason for existence other than to add a facial argument that this entire proceeding is something more than a simple dispute between the debtor or the Cabot interests and Sonatrach. A dispute occasioned by a desire on the one side to avoid a burdensome contract, now that gas prices have dropped and the government has relieved the ultimate purchasers from their commitments to purchase from DOMAC at above market prices and at larger than needed quantities. This Court has previously allowed the debtor to reject the contract with Sonatrach as unduly burdensome, as a matter of business judgment. The last shipment occurred in August of 1985. The debtor has neither received nor sold any LNG since then.

Sonatrach seeks damages for the breach of its contract in the amount of $1,839,990,000.00 or $1,262,900,000.00 in 1985 dollars, discounted to present value at a rate of 6%, which is the contract price for the 14 cargoes of LNG which should have been made by Sonatrach to the debtor in 1985, and 14 shipments per year for the next 13 years which Sonatrach claims under its contract with the debtor.

Since February 1986, the debtor has submitted four versions of a potential plan, all of which require as a sine qua non, a new source of LNG and Domac's ability to find sufficient customers. Recently the plan has purported to have two classes of creditors. Class I, the State of New Jersey, which has filed both as a secured and unsecured claim in an unspecified amount for clean-up of the toxic waste based on its state statute, N.J.S.A. 58:10-23.11 to 58:10-23.11 to 58:10-23.24, 58:10-23.34, familiarly known as the Spill Act, and the federal environmental clean-up statute, 42 U.S.C. § 9607 familiarly known as CERCLA. Class II, the remaining unsecured creditors which, whether in reality is only Sonatrach, or not, is clearly dominated by Sonatrach.

Sonatrach objects to confirmation and has moved for dismissal of the Chapter 11, or a conversion to Chapter 7.

In order to have a confirmable plan, if there is an impaired class, there must be at least one actual consenting impaired class, 11 U.S.C. § 1129(a)(10).

(a) The court shall confirm a plan only if all of the following requirements are met:

(10) If a class of claims is impaired under the plan, at least one class of claims that is impaired under the plan has accepted the plan, determined without including any acceptance of the plan by any insider.

Impairment's meaning is spelled out in 11 U.S.C. § 1124 and has, generally, come to mean in its most basic form any material alteration of the holder's legal, equitable, or contractual rights, unless payment in cash of the allowed amount of claim is made on the effective date of the plan.¹

Clearly, Class II is impaired since Sonatrach's contract has been rejected and, therefore, considered as breached just prior to filing. 11 U.S.C. § 502(g). While the plan calls for the payment of $12,400,000 for the last shipment, it does not provide for damages caused by the breach and, in fact, seeks to defend against all or part of the liability based on theories of frustration and performance excused for reasons of force majeure. Under the contract, the dispute would be resolved by arbitration in Switzerland which Sonatrach has tried to insist upon and which the debtor seeks to avoid by bankruptcy and the rejection of the contract. Sonatrach's contractual rights are clearly being materially altered. Sonatrach has rejected the plan and, therefore, Class II has rejected. The only possibility left to the debtor is to consider the potential of a cram down, which requires the acceptance of one impaired class.

Class I consists solely of the State of New Jersey which has not only accepted the plan, but has entered into an extensive Administrative Consent Order with the debtor relative to a complete resolution between the parties of the toxic waste problem, so that the threshold issue turns on New Jersey's status. Can New Jersey be considered a class and, if the type of claim that it has constitutes a class, is it an impaired class?

Here, two important governmental concerns appear to be in conflict. On the one hand, bankruptcy's interest in reorganization and a fresh start based on discharge of pre-filing obligations and the abandonment or rejection of burdensome property or contracts, and stays, automatic and otherwise, needed to accomplish that result. On the other side is a strong and growing recognition of society's interest in protecting the environment and the health and safety of the inhabitants thereof. This latter goal has been provided for in the exempting of the exercise of police power from the automatic stay in 11 U.S.C. § 362(b)(4) & (5) and, as to discharge, 11 U.S.C. § 523(a)(7), and such state statutes as New Jersey's Spill Act and the Congressional CERCLA.

These competing interests have been examined by the Supreme Court in two fairly recent cases, Ohio v. Kovacs, 469 U.S. 274, 105 S.Ct. 705, 83 L.Ed.2d 649 (1985); Midland National Bank v. New Jersey Department of Environmental Protection, ___ U.S. ___, 106 S.Ct. 755, 88 L.Ed.2d 859, 13 B.C.D. 1262 (1986), rehearing denied, ___ U.S. ___, 106 S.Ct. 1482, 89 L.Ed.2d 736 (1986). If there is any unifying thread apparent in these decisions, it is that the two major objectives are both important and to the extent possible, should be reconciled. An economic fresh start can only be meaningful and continue to flourish in a safe environment. Although pre-filing judgments may be discharged, in bankruptcy, clean-up orders are fully enforceable as would be an appropriate lien on the property which may even have priority, if necessary, over other secured claimants to the extent of available assets. The trustee cannot duck his responsibility for clean-up by abandoning the burdensome property.

Now, how does all of this apply to the matter at hand? The debtor, somewhat oddly, is vigorously defending New Jersey's position, apparently, in the belief that only by conceding to New Jersey a valid impaired claim, in its initial plan of March 27, 1986, it described New Jersey's claim as unimpaired can it have any potential for carrying out its plan of reorganization. New Jersey, up to the time of the filing, indeed, even to this point, has merely sent a letter to the debtor in an effort to enforce its clean-up powers. New Jersey has neither commenced formal action nor activity to compel the debtor to clean up the toxic waste left by Koppers Company, the previous owner, who creosoted poles on the property, nor has the state spent any of its own money in any clean-up effort. The debtor and New Jersey argue that New Jersey holds a contingent claim under the definition of claims in 11 U.S.C. § 101(4).² Asserting that since all of the contamination occurred pre-filing, then, under both the New Jersey Spill Act and the Federal CERCLA Act, New Jersey can order cleanup or do it itself and seek reimbursement and, at least, under the New Jersey Act, obtain a lien to reimburse money spent after such expenditure. Under this analysis, New Jersey would seem to hold an allowed claim under 11 U.S.C. § 502 and thereby be entitled to vote under 11 U.S.C. § 1126(a).³ New Jersey joins in the contention that it is at least a contingent secured creditor under the Spill Act and further argues that it is an unsecured administrative creditor to the extent that the property is inadequate to pay the full costs.⁴

Sonatrach argues that...