In re Dow Corning Corp.

CourtUnited States Courts of Appeals. United States Court of Appeals (6th Circuit)
Citation456 F.3d 668
Docket NumberNo. 04-1722.,No. 04-1720.,No. 04-1643.,No. 04-1721.,No. 04-1608.,04-1608.,04-1643.,04-1720.,04-1721.,04-1722.
PartiesIn re: DOW CORNING CORPORATION, Debtor. Official Committee of Unsecured Creditors, et al., Appellants/Cross-Appellees, v. Dow Corning Corporation, Appellee/Cross-Appellant, Dow Chemical Corporation and Corning Incorporated, Appellees.
Decision Date26 July 2006

York, for Appellants. David M. Bernick, Kirkland & Ellis, Chicago, Illinois, for Appellees. ON BRIEF: Donald S. Bernstein, Ogden N. Lewis, Michael S. Flynn, Davis, Polk & Wardwell, New York, New York, Glenn E. Siegel, Dechert, New York, New York, Sheryl L. Toby, Dykema Gossett, Detroit, Michigan, Annette W. Jarvis, Salt Lake City, Utah, Robert S. Hertzberg, Pepper & Hamilton, Detroit, Michigan, Andrew N. Rosenberg, Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York, Patrick A. Murphy, Murphy, Weir & Butler, San Francisco, California, Stephen Blauner, Milbank, Tweed, Hadley & McCloy, New York, New York, Robert M. Novick, Kasowitz, Benson, Torres & Friedman, New York, New York, for Appellants. David M. Bernick, Douglas Geoffrey Smith, Kirkland & Ellis, Chicago, Illinois, for Appellees.

Before: MOORE and COLE, Circuit Judges; WISEMAN, District Judge.*

OPINION

R. GUY COLE, JR., Circuit Judge.

Numerous bankruptcy creditors of Dow Corning Corp., who collectively hold approximately $1 billion in commercial debt, argue that the bankruptcy court erred in only allowing claims for post-petition interest at the non-default contract rate, as identified in their debt contracts, rather than at the contracts' default rate. Dow Corning argues in a cross-appeal that the bankruptcy court should have ordered the payment of post-petition interest at the non-default variable rate required by the contracts, rather than at a numerically fixed rate as of the date of the bankruptcy filing. Finally, the creditors argue that they should be awarded their attorneys' fees, costs and expenses, since Dow Corning has always been fully solvent and is still solvent post-bankruptcy. Because solvent-debtor cases present a situation where all parties ought to be granted the benefit of their bargains, unless the equities compel a contrary result, we VACATE the judgments below and REMAND for reconsideration consistent with this opinion.

I. BACKGROUND

Dow Corning is a joint venture wholly owned by its two shareholders, Dow Chemical Co. and Corning Corp. On May 15, 1995, Dow Corning filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.1 Unlike most debtors in bankruptcy, Dow Corning was fully solvent at the time it filed its bankruptcy case; it has remained so throughout the proceedings and has never disputed its ability to pay all of its creditors. Rather, the purpose of the bankruptcy petition was to enable prompt and uniform settlement of the numerous breast-implant-related lawsuits pending against Dow Corning at the time of the petition.

During years of negotiations and settlements, Dow Corning continued its business and did not make any payments on its more than $1 billion in unsecured debt. When a reorganization plan was finally proposed in 1999, it included provisions for payment of the principal amount of all of the unsecured debt, along with post-petition interest at the "federal judgment rate" of 6.28%, compounded annually. The majority of the unsecured commercial debt contracts would have required a rate higher than the federal judgment rate. Not surprisingly, the unsecured commercial debt holders (hereinafter "Class 4" or the "Class 4 creditors") voted overwhelmingly against the plan. These creditors are the appellants in this case.

Under the Bankruptcy Code, a plan may not be confirmed by a court over the objection of a class of creditors unless, among other things, the following requirements are met: (1) under the plan, the class would receive an amount that is equal to or greater than the amount they would receive if the debtor's assets were liquidated, see 11 U.S.C. § 1129(a)(7); and (2) the plan is found to be fair and equitable, see 11 U.S.C. § 1129(b)(1). By incorporating the fair and equitable standard in § 1129(b) of the Code, Congress codified the "absolute priority rule," which provides that absent full satisfaction of a creditor's allowed claims, no member of a class junior in priority to that creditor may receive anything at all on account of their claim or equity interest. See Case v. L.A. Lumber Prods. Co., 308 U.S. 106, 115, 60 S.Ct. 1, 84 L.Ed. 110 (1939). Here, the Class 4 creditors objected to the plan on two grounds. First, they argued that they were receiving less than they would have received if Dow Corning were liquidated. Second, they argued that the bankruptcy court's imposition of the federal judgment interest rate, as opposed to the rates required by the debt contracts, meant that Class 4 was not being paid the full interest it was owed, while Dow Corning's two shareholders, both in a class undisputedly junior to Class 4, were retaining millions of dollars in equity. See In re Dow Corning Corp., 244 B.R. 678, 680 (Bankr.E.D.Mich. 1999).

After hearing the objections, the bankruptcy court overruled Class 4's first objection, determining that Class 4 was going to be paid at least as much as it would have received had Dow Corning's assets been liquidated. In re Dow Corning Corp., 237 B.R. 380, 409 (Bankr.E.D.Mich. 1999). However, in a later opinion, the bankruptcy court agreed with Class 4 that the plan as it had previously existed was not "fair and equitable" since junior claims were being paid while Class 4's allowed claims had not been fully satisfied:

Where the debtor is solvent, the bankruptcy rule is that where there is a contractual provision, valid under state law, providing for interest on unpaid installments of interest, the bankruptcy court will enforce the contractual provision with respect to both instalments [sic] due before and . . . after the petition was filed. . . . This rule is fair and equitable inasmuch as the solvent debtor's estate will have been enriched by the bankruptcy trustee's use of money which the debtor had promised to pay promptly to the creditor, and, correspondingly, the creditor will have been deprived of the opportunity to use the money to his advantage. Moreover, the rule does not in any way affect any creditor other than the claimant of interest on interest. . . . The Proponents [of the proposed plan] made only a half-hearted effort to persuade the Court that use of the statutory interest rate is fair. They directed the Court's attention to our prior decision, in which we stated in dictum that "the payment of post-petition interest at the federal judgment rate does not provide a windfall to debtors and its use cannot be seen as . . . inequitable to unsecured creditors." Dow Corning, 237 B.R. at 409. This statement, however, was premised on the view that a chapter 7 creditor's prepetition contractual rights are essentially replaced by, or merged into, the allowed claim. See Dow Corning, 237 B.R. at 391-92, 405, 409. That is not the case with respect to a chapter 11 claim.

In re Dow Corning Corp., 244 B.R. 678, 695-96 (Bankr.E.D.Mich.1999) (emphasis in the original, some citations omitted). The court stated that it was sustaining Class 4's objections and deemed "the Plan to have been verbally amended to provide that pendency interest will be paid to Class 4 creditors in accordance with the terms of the parties' contracts." Id. at 696. However, this determination was made with one caveat: "In determining the applicable rate, however, no effect is to be given to contractual provisions which purport to define as a default the filing of a voluntary petition for bankruptcy relief." Id. Following the bankruptcy court's decision that pendency interest would be paid to Class 4 "in accordance with the terms of the parties' contracts," the plan as a whole was deemed to be "fair and equitable" to Class 4, and it was thus confirmed without a re-vote. The plan includes a choice-of-law provision indicating that New York law shall govern its interpretation.

The plan was to take effect in June 2004, and between 1999 and 2004, Dow Corning and its creditors litigated the validity of the claims that would be paid under the plan. Dow Corning objected to Class 4's claims for money due under a default rate of interest, in addition to other post-petition fees, costs, and expenses. Class 4 moved for summary judgment with regard to these claims. In April 2001, the bankruptcy court held a hearing on these objections, and ruled in favor of Dow Corning. With regard to the default interest rate, the court found that it had not initially awarded default interest, and that Class 4 did not have an automatic right to such interest. It noted that the amended plan provided for post petition interest at "the applicable contract rate . . . in effect on May 15, 1995, the date Dow Corning's bankruptcy case commenced." The court ruled it could not award default interest given that there was no evidence that it would be fair and equitable to award additional default interest and because Dow Corning had not been in default on the date of the bankruptcy filing. With regard to post-petition fees, costs and expenses, the court found that CPT Holdings, Inc. v. Industrial & Allied Employees Union Pension Plan, Local 73, 162 F.3d 405 (6th Cir.1998), had effectively overruled prior Sixth Circuit precedent, namely In re Martin, 761 F.2d 1163, 1167-68 (6th Cir. 1985), which had held that such charges are recoverable. The bankruptcy court thus granted summary judgment to Dow Corning on this issue as well.

Pursuant 28 U.S.C. § 158(a), Class 4 appealed each of these decisions to the district court. The district court determined first that the bankruptcy court...

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