In re Eastern Maine Elec. Co-op., Inc.
| Decision Date | 25 March 1991 |
| Docket Number | Bankruptcy No. 87-10290. |
| Citation | 125 BR 329 |
| Parties | In re EASTERN MAINE ELECTRIC COOPERATIVE, INC., Debtor. |
| Court | U.S. Bankruptcy Court — District of Maine |
William C. Black, Public Advocate, Augusta, Me., for Maine Public Advocate.
Joanne B. Steneck, Maine Public Utilities Com'n. Augusta, Me., for MPUC.
Louis H. Kornreich, Gross, Minsky, Mogul & Singal, Bangor, Me., Mark Haley, Conley, Haley & O'Neil, Bath, Me., for EMEC.
John M. Grugan, Ferriter, Scobbo, Sikora, Caruso & Rodophels, Boston, Mass., Gary L. Blum, Olwine, Connelly, Chase, O'Donnell & Weyher, New York City, for MMWEC.
Peter B. McGlynn, Rosen, Crosson, McGlynn & Resnek, Boston, Mass., for 16 Individual Participants.
John F. Logan, Logan, Kurr & Hamilton, Bangor, Me., for Project No. 6 Participants Committee.
Lloyd Randolph, Civ. Div., Dept. of Justice, Washington, D.C., for U.S.
The court today disapproves the debtor's third amended disclosure statement.1 The procedural history culminating in its filing is lengthy and complex. Because a comprehensive overview of the case is set forth elsewhere, it will not be repeated here.2 However, consideration of the disclosure statement, to which a critical analysis of the claims classification scheme proposed by the debtor is indispensable, dictates that today's discussion include a precis of the plan's evolution.
Eastern Maine Electric Cooperative, Inc. ("EMEC"), is a rural electric cooperative serving areas within Eastern Maine. It is organized under Maine's statute specifically addressing such cooperative utilities. 35-A M.R.S.A. § 3701, et seq. EMEC's customers include some who are "members" of the cooperative, and some who are not.3
EMEC sought refuge in Chapter 11 from the crush of financial obligations attending its involvement in purchasing a portion of the power to be generated by Public Service Company of New Hampshire's Seabrook Nuclear Power Project on August 31, 1987.4
EMEC has filed a succession of disclosure statements and proposed plans of reorganization5. The third amended plan proposes the following classifications:6
1. Class 1 treats individual rate payers with unsecured claims for residential deposits paid prior to the date of filing. Class members will have their deposits returned in accordance with the EMEC's bylaws and rules and regulations.
2. Class 2 includes the secured claims of the Rural Electrification Administration (REA) and National Rural Utilities Cooperative Finance Corp. (CFC). EMEC proposes to pay their claims in accordance with the pre-filing loan documentation. The REA and CFC will retain their joint security interest and mortgage in EMEC's real and personal property.
3. Class 3 comprehends those rate payers with claims arising from pre-filing deposits for commercial electric service. They will be paid the allowed amount of their claims in accordance with EMEC's by-laws and rules and regulations.
4. Class 4, an administrative convenience class, consists of creditors with unsecured claims of $200.00 or less and creditors who elect to reduce their claims to $200.00. Members will be paid in cash, without interest, on a post-confirmation distribution date.7
5. Class 5, the general unsecured class, includes the claims of MMWEC and other signatories to the Project No. 6 Agreement (the "Participants"),8 among others. EMEC disputes all but a handful of the claims within this class, although it would accept the MMWEC claim as treated by the compromise approved by this court's order of May 11, 1990.9 That order is presently on appeal to the United States District Court.10 EMEC proposes to pay Class 5 claims pro-rata, by deferred payments with a present value of $7,293,271.15, distributed over thirty years. Class 5 has been impaired under each version of EMEC's plan. Although membership of Class 5 has remained constant, the dollar amounts to be distributed to its members has changed as a consequence of changes in EMEC's position regarding valuation of its enterprise.
6. Class 6 addresses EMEC's customers' rights to $1,294,509.72 "patronage capital" allocated to them prior to the bankruptcy filing. Patronage capital, a concept unique to cooperative organizations, accounts for excess revenues over expenses under a scheme defined by state law and the cooperative's by-laws.11 EMEC's earlier proposals provided that each rate payer would retain the "value" of his allocated patronage capital credits, but that no distributions would be made to retire them until all senior classes, including the general unsecured claims in Class 5, were fully paid.12 Later versions of the plan proposed to cancel patronage capital credits but provided that EMEC would employ their value to pay future expenses or to defer post-confirmation rate increases.13 The third amended plan switches the class designation from "Capital Credits" to "Patronage Refunds" and, for the first time, calls for a monetary payment to class members. Instead of cancelling patrons' rights on confirmation, the plan now provides that class members are to be paid their pro-rata share of $200, 281.07, in cash, within one year of the effective date of the plan.
7. The cooperative's members' additional interests were initially treated as Class 7, but later addressed in Classes 7 and 8. The first two proposed plans permitted members of the cooperative to retain their interests to the extent of paid-in membership fees.14 However, they provided that fees would not be refunded until allowed administrative claims and senior unsecured claims, including Classes 5 and 6, were paid in full.15 EMEC's second amended plan dealt with members' rights in their $5.00 membership fees in Class 7 and with their remaining rights, e.g., to vote for management, in Class 8. The second amended plan provided that members of Classes 7 and 8 would not receive or retain any property on account of paid-in fees or other membership rights.
The third amended plan, while proposing that Class 8 claimants retain nothing on account of their nonpecuniary interests, provides that Class 7 claims are to be paid pro-rata shares of $6,447.78, in cash, within one year of the effective date of the plan.
Hearings addressing the adequacy of EMEC's disclosure statement, which had by then evolved to its "modified second amended" stage, were held on October 2, 1990. Thereafter, the parties briefed disclosure issues in light of the evidence. It was in response to the hearings that EMEC further modified its proposals by filing its third amended plan and accompanying disclosure statement. Because the final edition of the plan included substantive changes regarding the treatment of claims, briefing was extended.
Responding to criticisms of its third amended plan, EMEC sought, and was provided, the opportunity to present evidence on classification.16 Hearings ensued. The parties completed briefing the issues on February 8, 1991, and on that date the court took under submission all issues relating to the third amended disclosure statement and EMEC's classification strategy.
Those opposing approval of the disclosure statement have articulated concerns within two broad categories. The first consists of objections, largely legal, to the classification and treatment of claims which, it is contended, render EMEC's plan unconfirmable on its face. The second is comprised of disputes, wholly factual, concerning the details of disclosure and its adequacy.
Before embarking on an analysis of the disclosure statement itself, exposition of the analytical framework to be employed is in order.
The court has an independent obligation to determine whether a disclosure statement includes adequate information within the meaning of the Bankruptcy Code. 11 U.S.C. § 1125(b). See In re Cardinal Congregate I, 121 B.R. 760, 764 (Bankr.S.D.Ohio 1990). The process necessarily entails two stages of analysis, although it is, more often than not, unnecessary to tarry long at the first.
If the disclosure statement describes a plan that is so "fatally flawed" that confirmation is "impossible," the court should exercise its discretion to refuse to consider the adequacy of disclosures. In re Cardinal Congregate I, supra, 121 B.R. at 764; In re Monroe Well Service, Inc., 80 B.R. 324 (Bankr.E.D.Pa.1987); In re Pecht, 57 B.R. 137 (Bankr.E.D.Va.1986). Such an exercise of discretion is appropriate because undertaking the burden and expense of plan distribution and vote solicitation is unwise and inappropriate if the proposed plan could never legally be confirmed. See In re Pecht, supra.
The question whether a plan meets requirements for confirmation is usually answered at confirmation hearings. In re Unichem Corp., 72 B.R. 95, 98 (Bankr.N.D. Ill.1987). Where the plan's inadequacies are patent, they may, and should be addressed at the disclosure statement stage. Id. Disclosure hearings anticipate, but do not preempt, confirmation hearings. In re Copy Crafters Quickprint, Inc., 92 B.R. 973, 980 (Bankr.N.D.N.Y.1988). Accordingly, the disclosure statement should be disapproved at the threshold only where the plan it describes displays fatal facial deficiencies or the stark absence of good faith. See In re Dakota Rail, Inc., 104 B.R. 138, 144 (Bankr.D.Minn.1989); In re Unichem Corp., supra.
Assuming that the proponent's efforts propel it over the initial hurdle, the statement's adequacy must be evaluated in light of the facts unique to the case. In re Cardinal Congregate I, supra. The debtor's particular circumstances must be taken into account.17 In re Microwave Products of America, Inc., 100 B.R. 376, 377 (Bankr.W.D.Tenn.1989). In re Stanley Hotel, Inc., 13 B.R. 926 (Bankr.D.Colo.1981). See also In re Metrocraft Pub....
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