In re Easterday Ranches, Inc.

• Decision Date: 23 November 2022
• Docket Number: Lead Case No. 21-00141-WLH11 (Jointly Administered)
• Citation: 647 B.R. 236
• Parties: IN RE: EASTERDAY RANCHES, INC., et al., Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Washington

647 B.R. 236

IN RE: EASTERDAY RANCHES, INC., et al., Debtors.

Lead Case No. 21-00141-WLH11 (Jointly Administered)

United States Bankruptcy Court, E.D. Washington.

Signed November 23, 2022

Sam Alberts, Dentons US LLP, Washington, DC, Christopher Durbin, Cooley LLP, Seattle, WA, Weiru Fang, Cooley LLP, Washingtion, DC, Jay R. Indyke, Michael Klein, Evan Lazerowitz, Cullen D. Speckhart, Cooley LLP, New York, NY, Sarah M. Schrag, Dentons US LLP, New York, NY, Joseph M. Welch, Buchalter, A Professional Corporation, Irvine, CA, for Creditor Committees Official Committee of Unsecured Creditors of Easterday Ranches, Inc.

Jason M. Ayres, Foster Garvey P.C., Portland, OR, for Creditor Committees Animal Health International, Inc.

Bruce K Medeiros, Davidson Backman Medeiros, Spokane, WA, for Creditor Committees J.R. Simplot.

Tara J. Schleicher, Foster Garvey P.C., Portland, OR, for Creditor Committees Animal Health International, Inc.

Thomas A. Buford, Richard B. Keeton, Armand J. Kornfeld, Bush Kornfeld LLP, Seattle, WA, John D. Fiero, Pachulski Stang Ziehl & Jones LLP, San Francisco, CA, Ira D. Kharasch, Pachulski Stang Ziehl & Jones LLP, Los Angeles, CA, Benjamin L. Wallen, Pachulski Stang Ziehl & Jones LLP, Houston, TX, for Debtor.

Gary W. Dyer, U S Trustee's Office, Spokane, WA, for U.S. Trustee.

MEMORANDUM OPINION

Whitman L. Holt, Bankruptcy Judge

The Bankruptcy Code is generally designed for single-debtor cases. When affiliated corporate debtors file related cases, administration of those cases sometimes reveals gaps and ambiguities in the statutory scheme, particularly regarding intercompany rights. This uncertainty matters because intercompany disputes are increasingly marquee events in multi-debtor chapter 11 cases.

Although the instant cases involved just two affiliated debtors, they required navigating many significant and complex intercompany issues. The United States trustee (the "UST") contends that the debtors’ lead bankruptcy counsel crossed lines during that voyage in a way requiring denial of some of the law firm's requested final fees. For the reasons detailed below, the court disagrees.

BACKGROUND & PROCEDURAL POSTURE

The Easterday Entities – A Prelude to Bankruptcy

Debtor Easterday Ranches, Inc. ("Ranches") was a Washington corporation engaged in, among other things, cattle ranching activities in eastern Washington. Easterday family members owned and managed Ranches.

Debtor Easterday Farms ("Farms") was a Washington general partnership engaged in, among other things, farming activities in eastern Washington. Easterday family members were general partners of the Farms partnership and Farms’ managers.

Over a period of several years, Cody Easterday—an Easterday family member and Ranches’ president—engaged in activity through Ranches that defrauded Tyson Fresh Meats and Segale Properties out of more than $244,000,000. Mr. Easterday accomplished this by charging Tyson and Segale for approximately 265,000 head of nonexistent, or "ghost," cattle. Soon after Mr. Easterday and Tyson personnel met to discuss the fraud, Tyson sued Ranches in Washington state court. This lawsuit, in turn, precipitated the Ranches chapter 11 bankruptcy petition at issue here.

Farms was not part of the ghost-cattle fraud, but Farms was jointly liable with Ranches on some funded debt. Because the Ranches bankruptcy filing (among other possible events) triggered a default of that debt, Farms followed Ranches’ lead and filed its own chapter 11 bankruptcy petition.

Key Events During the Bankruptcy Cases

These have been active and involved bankruptcy cases punctuated with many disputes along the way. Although the complete history of the cases provides background context for the present dispute, in the interest of brevity the court highlights only the most relevant events.

At the outset, it was apparent that Ranches, Farms, and their respective stakeholders held certain diverging interests. As a result, the UST determined it appropriate to appoint two official committees of unsecured creditors—one for each debtor. Each committee retained capable counsel and financial advisors.

Unsatisfied with this structural divide, the UST also objected to the proposed retention of common counsel and other professionals for the debtors. From the UST's perspective, the potentially divergent interests created insoluble conflicts that necessitated separate representation. The court overruled this objection, including because any intercompany disputes were theoretical at the time and because the dueling creditors’ committees provided structural checks against the dormant conflicts. The court agreed with debtors’ counsel that the common professionals could appropriately serve as a proverbial "honest broker" to mediate and facilitate resolution of issues among the various stakeholders. Debtors’ counsel also conceded, however, that separate representation would be required if the need for actual litigation between the Ranches and Farms arose.

During the middle phase of the cases, the debtors liquidated substantially all of their property, along with property that arguably belonged to the Easterday family. This included many acres of real property, substantial farm equipment, various crops, and aircraft. Liquidation of these assets created a "pot" containing hundreds of millions of dollars. Myriad complex issues then arose regarding the appropriate allocation of the pot among the two estates and the Easterday family.

The debtors sought to resolve the allocation and other issues through a comprehensive settlement, which involved trying to find consensus about many subjects among the creditors’ committees, Tyson, Segale, the Easterday family, and others. In the midst of protracted and undoubtedly difficult negotiations, the debtors filed a series of proposed chapter 11 plans and related papers. At a very high level, those plans can be summarized as follows:

• The debtors filed their first plan in August 2021, which contemplated the creation of two liquidating trusts. The plan provided that creditors of both debtors would get interests in their respective trust and the trusts would then engage in postconfirmation litigation about the allocation issues and other disputes.

• The debtors filed a second plan in December 2021. They built this plan around a "toggle" keyed to the outcome of an adversary proceeding the debtors commenced against the Easterday family. The plan projected recovery for creditors as follows: (i) Farms’ unsecured creditors were expected to receive 89%–94%; (ii) Ranches’ unsecured creditors were expected to receive 48%–49%; and (iii) Tyson and Segale were expected to receive 22% and 33%, respectively.

• The debtors filed a third plan in February 2022. This plan provided an 89% recovery for Farms’ unsecured creditors, but only if the class voted to accept the plan and only if individual creditors assigned their own claims against the Easterday family to a liquidation trust (if the class voted to reject, the maximum recovery would be fixed at 66.67% and further reductions applied to non-assigning individual creditors). The relative recoveries among Ranches’ general unsecured creditors, Tyson, and Segale were defined by a complex waterfall mechanic. The Easterday family vehemently opposed this plan.

• The debtors filed the fourth and final plan in May 2022. This plan contained a global settlement among the two committees, Tyson, Segale, and the Easterday family. The plan provided a 100% recovery (without postpetition interest or attorneys’ fees) for Farms’ unsecured creditors and an agreed relative distribution of remaining value among Ranches’ unsecured creditors, Tyson, and Segale. The Easterday family contributed assets and made other concessions to fund the plan.

The debtors solicited votes only for the fourth and final plan. All impaired voting classes overwhelmingly accepted the plan and, with minor preconfirmation modifications, the court ultimately confirmed that plan. The confirmed plan comprehensively resolved many issues that would have—probably individually and certainly collectively—taken many years to litigate on the merits, including:

• The relative allocation of asset-sale proceeds as among the Ranches estate, the Farms estate, and the Easterday family;

• The relative allocation of liabilities as between the Ranches estate and the Farms estate, including relative liability for bankruptcy administrative expenses and regarding co-liable secured debts satisfied during the cases; • The existence, amount, and priority of any other intercompany claims by Ranches against Farms and vice versa;

• Whether and how the Ranches estate, the Farms estate, and any nondebtor affiliates should be combined based on the doctrine of substantive consolidation;

• Potential affirmative claims that the Ranches estate or the Farms estate could assert against members of the Easterday family (or their nondebtor relatives and affiliated entities), Tyson, or Segale; and

• Any other issues bearing on the relative claims and rights of Farms’ creditors, Ranches’ general unsecured creditors, Tyson, Segale, and the Easterday family regarding the value to be distributed under the plan.

The negotiation and confirmation of this plan is an unquestioned success and a laudable example of how to utilize the bankruptcy process to resolve highly-complex disputes capable of consuming tremendous resources to litigate to finality.

The PSZJ Fee Dispute

The UST initiated the present dispute by objecting to the fourth interim fee application of Pachulski Stang Ziehl & Jones LLP ("PSZJ"), which sought compensation in the firm's capacity as the debtors’ lead bankruptcy counsel.¹

The thrust of the UST's objection is that (i) the December 2021 and February 2022 plans (together, the "Offending Plans") impermissibly subordinated the interests of the Farms stakeholders to those of the Ranches estate; (ii) giving rise to an actual conflict between the estates; and (iii) therefore, the court should deny PSZJ...