In re Enron Corp.

• Decision Date: 17 November 2005
• Docket Number: Bankruptcy No. 01-16034 (AJG).,Adversary No. 05-01029.
• Citation: 333 B.R. 205
• Parties: In re ENRON CORP., et al., Reorganized Debtors. Enron Corp., Plaintiff, v. Avenue Special Situations Fund II, LP, DK Acquisition Partners, LP, RCG Carpathia Master Fund, Ltd., Rushmore Capital-I, L.L.C., and Rushmore Capital-II, L.L.C., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

333 B.R. 205

In re ENRON CORP., et al., Reorganized Debtors.

Enron Corp., Plaintiff, v. Avenue Special Situations Fund II, LP, DK Acquisition Partners, LP, RCG Carpathia Master Fund, Ltd., Rushmore Capital-I, L.L.C., and Rushmore Capital-II, L.L.C., Defendants.

Bankruptcy No. 01-16034 (AJG).

Adversary No. 05-01029.

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

November 17, 2005.

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Susman Godfrey L.L.P., H. Lee Godfrey, Kenneth S. Marks, Mary Kathryn Sammons, James T. Southwich, of Counsel, Houston, TX, Special Litigation Counsel to the Reorganized Debtors.

Togut, Segal & Segal LLP, Albert Togut, Scott E. Ratner, Richard K. Milin, of Counsel, New York City, for Reorganized Debtors.

Ropes & Gray LLP, David Elkind, Marc Skapof, of Counsel, New York City, Matthew M. Burke, Stephen Moeller-Sally, of Counsel, Boston, MA, for DK Acquisition Partners, LP, RCG Carpathia Master Fund, Ltd., Rushmore Capital-I, L.L.C., and Rushmore Capital-II, L.L.C.

Allen & Overy LLP, Hugh McDonald, of Counsel, New York City, for Barclays Bank PLC, and its Affiliates.

Sullivan & Cromwell LLP, David H. Braff, Michael T. Tomaino, Jr., Jeffrey T. Scott, of Counsel, New York City, for Barclays Bank PLC, and its Affiliates.

Cravath, Swaine & Moore LLP, Richard W. Clary, Julie A. North, Darin P. McAtee, of Counsel, New York City, for Credit Suisse First Boston LLC, and its Affiliates.

Mayer, Brown, Rowe & Maw LLP, Robert J. Ward, Andrew D. Shaffer, of Counsel, New York City, for Canadian Imperial Bank of Commerce, CIBC Capital Corporation, CIBC World Markets Corp., CIBC Capital Corporation, CIBC World Markets plc, and CIBC, Inc.

Paul, Weiss, Rifkind, Wharton & Garrison LLP, Stephen J. Shimshak, Douglas R. Davis, of Counsel, New York City, for Citibank, N.A.

Shearman & Sterling LLP, Herbert Washer, William J.F. Roll III, Kristin

Fitzmaurice, of Counsel, New York City, for Merrill Lynch & Co. Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., and Merrill Lynch Capital Services, Inc.

Seward & Kissel LLP, Michael J. McNamara, John R. Ashmead, Mark D. Kotwick, of Counsel, New York City, for Royal Bank of Canada, et al.

Seward & Kissel LLP, Ronald L. Cohen, John J. Galban, of Counsel, Kasowitz, Benson, Torres & Friedman LLP, David M. Friedman, Richard F. Casher, Robert M. Novick, Daniel N. Zinman, of Counsel, New York City, for The Bank of New York, as Indenture Trustee and Collateral Agent, and Yosemite/CLN Trust.

McGuirewoods LLP, John H. Maddock, III, of Counsel, New York City, Robert Plotkin, Dion W. Hayes, of Counsel, Washington, DC, for The Toronto-Dominion Bank.

ARTHUR J. GONZALEZ, Bankruptcy Judge.

The matter before the Court concerns claims asserted against a bankruptcy estate that arise out of certain bank loans. The bank that was the original holder of the bank-loan claims in issue transferred those claims to third parties. The transferring bank allegedly engaged in certain inequitable conduct regarding two prepaid forward transactions, unrelated to the bank-loan claims, which are currently the subject of a separate adversary proceeding commenced against several banks. The issue presented is whether the bank-loan claims, which were transferred by the original holder of the claims who is alleged to have engaged in certain inequitable conduct, would be subject to subordination under section 510(c) of the Bankruptcy Code in the hands of a transferee.¹

The Court has bifurcated the issue. The first inquiry is whether section 510(c) of the Bankruptcy Code grants a court authority to subordinate claims that did not arise from any misconduct, but were held by a creditor who is found to have engaged in inequitable conduct regarding the debtor. The second inquiry is to what extent, if any, a claim subject to equitable subordination in the hands of a transferor remains subject to equitable subordination in the hands of a transferee.

Regarding the first inquiry, the Court concludes that equitable subordination is not limited to only those claims related to the inequitable conduct that caused the injury to the creditor class. Rather, equitable subordination can apply to claims unrelated to any inequitable conduct held by the claimant alleged to have engaged in that conduct, limited by the amount of damages stemming from the inequitable conduct that is not otherwise compensated to that class.

With respect to the second inquiry, the Court concludes that the transfer of a claim subject to equitable subordination does not free such claim from subordination in the hands of a transferee. Rather, a claim in the hands of a transferee, either as an initial transferee or a subsequent transferee, who received that claim from a transferor found to have engaged in inequitable conduct is subject to the same equitable relief, as if, such claim was still held by the transferor. The remedy of equitable subordination remains with the claim. Therefore, a claim in the hands of a transferee is not immunized from subordination even though such transferee may have paid value for such claim and not have engaged in any conduct that would otherwise subject the transferee to the remedy of equitable subordination.

The Court also concludes that the remedy of subordinating claims in the hands of a transferee, not found to have engaged in inequitable conduct, does not contradict the purpose of section 510(c) of the Bankruptcy Code or any provision therein. Rather, it ensures that the purpose of the statute is fulfilled because a creditor, who is found to have engaged in inequitable conduct and harmed its creditor class, would not be permitted to frustrate, hinder, dilute or in any way delay distribution to the other members of the injured creditor class by means of transferring its claims.

Lastly, the Court concludes that the policy underlying the "good faith" defense in various provisions of the Bankruptcy Code does not warrant the extension of such defense to purchasers of claims. Further, the Court finds that a transferee purchasing a post-petition claim cannot avail itself of the "good faith" defense because such transferee is not a purchaser who took without knowledge of potential actions that could be brought regarding the purchased claims. Rather, by purchasing claims in a bankruptcy proceeding, the transferee knows or should know that such claims would be subject to review and investigation. The possibility of the commencement of an action by a trustee or a debtor in possession, who is obligated to prosecute actions in furtherance of the interests of the estate, including equitable subordination, is one of the assumed risks attendant to the purchase of a claim. The possibility of such action is not mere speculation as may be the case regarding a "good faith" purchaser who by definition purchases without knowledge that an investigation of property at issue would be undertaken. Rather, the purchaser of a claim does so with the knowledge that the estate's fiduciary must examine each claim to determine whether an action, including one based upon equitable subordination, is warranted. Further, there is no dispute that such risks are routinely protected against in transfer documents. Whether the purchaser of a claim protects itself is not an issue with which the Court need be involved.

Enron's cause of action based on equitable subordination is sufficient to withstand a motion to dismiss. Therefore, Defendants motion to dismiss based upon the alleged inapplicability of section 510(c) of the Bankruptcy Code to the bank loan claims in the hands of a transferee is denied.

FACTS

Commencing on December 2, 2001 (the "Petition Date"), and from time to time continuing thereafter, Enron Corporation ("Enron") and certain of its affiliated entities, (collectively, the "Debtors"), filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). On July 15, 2004, the Court entered an Order confirming the Debtors' Supplemental Modified Fifth Amended Joint Plan of Affiliated Debtors (the "Plan") in these cases. The Plan became effective on November 17, 2004.

As borrower, Enron entered into a $1,750,000,000 364-day Revolving Credit Agreement (the "Short-Term Credit Agreement"), dated May 14, 2001, and a $1,250,000,000 Long-Term Revolving Credit Agreement (the "Long-Term Credit Agreement"), dated May 18, 2000, (collectively, the "Credit Agreements") with certain participating banks (the "Banks"), among them, Citibank, N.A. ("Citibank") as paying agent, and Citibank and Chase Manhattan Bank ("Chase") as co-administrative agents. Fleet National Bank ("Fleet") loaned Enron $53,666,666.67 as one of the Banks participating in the Short-Term Credit Agreement.

On October 15, 2002, the Court authorized Citibank to file two proofs of claim (Claim Nos. 14196 and 14179) in its capacity as paying agent on behalf of certain creditors, including Fleet, under the Credit Agreements. Citibank sought a consolidated secured claim in the amount of $1,754,024,000, plus unliquidated amounts for the principal and unpaid interest under the Short-Term Credit Agreement and a consolidated secured claim in the amount of $1,253,196,000, plus unliquidated amounts for the principal and unpaid interest under the Long-Term Credit Agreement.

As of the Petition Date, Fleet was the original holder of the claims asserted against Enron's estate (the "Claims"). The Claims were ultimately transferred to Avenue Special Situations Fund II, LP ("Avenue"), DK Acquisition Partners, LP ("DK"), RCG Carpathia Master Fund Ltd. ("RCG"), Rushmore Capital-I, L.L.C. ("Rushmore I") and Rushmore Capital-II, L.L.C. ("Rushmore II") (collectively, the "Defendants").

On August 22, 2002, Fleet sold to Avenue $10 million of principal amount of the Claims under the Short-Term Credit Agreement. On October 24, 2002, Fleet sold to Credit Suisse First Boston ("CSFB") $29.5 million of principal...