In re New Century Holdings, Inc.

• Decision Date: 23 April 2008
• Docket Number: Bankruptcy No. 07-10416 (KJC).,Adversary No. 07-51598 (KJC).
• Citation: 387 B.R. 95
• Parties: In re NEW CENTURY HOLDINGS, INC., a Delaware Corporation, et al., Debtor. Gregory J. Schroeder, et al., Plaintiffs v. New Century Holdings, Inc., a Delaware Corporation, et al.; and Wells Fargo Bank N.A. a/k/a Wells Fargo Its, as trustee of the trust formed under the New Century Financial Corporation Supplemental Benefit and Deferred Compensation Trust Agreement; and Harold A. Black, Frederic J. Foster, Donald E. Lange, and Michael M. Sachs, in their capacity as the Compensation Committee of the Board of Directors of New Century Financial Corporation and therefore the Plan Administrator, and any successors thereto and any Committee (as defined in the Plan) appointed by the Plan Administrator; and The Official Committee of Unsecured Creditors, Defendants.
• Court: U.S. Bankruptcy Court — District of Delaware

387 B.R. 95

In re NEW CENTURY HOLDINGS, INC., a Delaware Corporation, et al., Debtor Gregory J. Schroeder, et al., Plaintiffs v. New Century Holdings, Inc., a Delaware Corporation, et al.; and Wells Fargo Bank N.A. a/k/a Wells Fargo Its, as trustee of the trust formed under the New Century Financial Corporation Supplemental Benefit and Deferred Compensation Trust Agreement; and Harold A. Black, Frederic J. Foster, Donald E. Lange, and Michael M. Sachs, in their capacity as the Compensation Committee of the Board of Directors of New Century Financial Corporation and therefore the Plan Administrator, and any successors thereto and any Committee (as defined in the Plan) appointed by the Plan Administrator; and The Official Committee of Unsecured Creditors, Defendants.

Bankruptcy No. 07-10416 (KJC).

Adversary No. 07-51598 (KJC).

United States Bankruptcy Court, D. Delaware.

April 23, 2008.

As Amended June 17, 2008.

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Joseph H. Huston, Jr., Stevens & Lee, P.C., Wilmington, DE, Michael A. Fagone, Robert J. Keach, Bernstein, Shur, Sawyer & Nelson, Portland, ME, for Plaintiffs.

Christopher M. Samis, Mark D. Collins, Richards, Layton & Finger, P.A., Christopher A. Ward, Klehr Harrison Harvey Branzburg & Ellers, Wilmington, DE, Suzzanne Si Uhland, Ben H. Logan, Brian M. Metcalf, Victoria Newmark, Emily R. Culler, O'Melveny & Myers LLP, San Francisco, CA, for Defendants.

Harold A. Black, Frederic J. Foster, Donald E. Lange, and Michael M. Sachs, in their capacity as the Compensation Committee of the Board of Directors of New Century Financial Corporation and therefore, pro se.

The Official Committee of Unsecured Creditors, pro se.

MEMORANDUM¹

KEVIN J. CAREY, Bankruptcy Judge.

Background

On June 20, 2007, Plaintiffs, Gregory J. Schroeder, et al.² ("Plaintiffs"), commenced this adversary proceeding by filing a complaint ("Complaint") against New Century Holdings, Inc., et al.³ ("Debtors") and several other defendants including Wells Fargo Bank N.A.⁴ ("Wells Fargo"), members of New Century's Board of Directors in their capacity as members of the Compensation Committee⁵ ("Compensation Committee"), and The Official Committee of Unsecured Creditors ("Committee"). In this action, the Plaintiffs seek a declaration that the New Century Deferred Compensation Plan ("Plan") is not a "top hat" plan as defined by the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and, therefore, is subject to all the substantive requirements of ERISA and'll U.S.C. § 541(b)(7). Alternatively, the Plaintiffs seek an order imposing a trust on the assets of the Plan to redress ERISA violations, or an order reforming the terms of the Plan, and/or the Trust containing the Plan's assets, to redress ERISA violations. The Plaintiffs seek attorneys fees and costs in both alternatives. In addition, the Plaintiffs seek an order certifying the Beneficiaries as a class under Rule 7023, appointing the Plaintiffs as representatives of the class and appointing as class counsel. `No class has been certified.

On July 25, 2007, the Debtors filed a motion to dismiss the Complaint which the Committee joined. On August 20, 2007, the Plaintiffs filed an answering brief opposing the Debtors' motion to dismiss. Wells Fargo filed its own motion to dismiss the Complaint on August 27, 2007, making arguments similar to those made by the Debtors, which the Committee also joined. On September 6, 2007, the Debtors filed a reply brief in support of their motion to dismiss, which the Committee joined. The Plaintiffs answered the Wells Fargo motion to dismiss on September 14, 2007. Subsequently, Wells Fargo filed a reply brief on September 21, 2007, which it supplemented on September 24, 2007. The Court heard oral argument on the pending motions on October 2, 2007. After argument, the Plaintiffs supplemented their Answering Brief on November 14, 2007, to which Wells Fargo responded on December 5, 2007. For the reasons which follow, the motions to dismiss will be denied.

Factual Allegations

For the purposes of ruling on the pending motions, the Court takes the facts alleged in the Complaint to be true. On or about January 1, 1999, the Debtors executed and made available to eligible employees of the Debtors a deferred compensation plan which was subsequently replaced with the Plan on July 1, 2004. Complaint, ¶ 14 The Plan is an employee benefit plan as defined by ERISA and is designed to "provide certain key employees" with "additional retirement benefits and increased financial security, on a tax favored basis." Complaint, ¶¶ 15-16. The Debtors intended the Plan to be a top hat plan exempted from the substantive provisions of ERISA. Complaint, ¶ 31. satisfy ERISA requirements for top hat plans, the Plan was designed as an unfunded plan, Complaint, 16, but is not, in fact, unfunded within the meaning of ERISA, Complaint, ¶ 38.

In addition, the Debtors created a trust to "assist [the Debtors] ... in meeting their respective liabilities under the [Plan]...." Complaint, 17. Wells Fargo is the trustee of the Trust. Complaint, ¶ 6.⁶ The Plaintiffs allege that all amounts withheld from employee compensation were placed into an account in Wells Fargo's name and have remained in that account (aside from any amounts distributed as deferred compensation under the Plan). Complaint, ¶ 8. In this segregated account, the Trustee currently holds amounts withheld from wages, bonuses, and salaries of employees participating in the Plan, which is in excess of $43,000,000. Complaint, ¶ 20. The terms of the Trust state that the Debtors have "no right or power to direct the Trustee to pay [the Debtors] or to divert to others any of the Trust assets before all payments of benefits have been made to the Participants ... pursuant to the terms of the Plan." Complaint, ¶ 19. This Court ordered that these amounts not be used for any purpose until further order of the Court. Complaint, ¶ 26.

The Plaintiffs allege that the Plan, while purporting to meet the ERISA requirements for a top hat plan, fails to meet one or more of those requirements. Complaint, ¶ 39. As a result, the Plan is subject to the substantive requirements of ERISA. Complaint, 39. If so, any employee contributions are "held in trust for the exclusive benefit of the Beneficiaries regardless of any language in the ... [agreement creating the Trust] or the Plan to the contrary." Complaint, ¶ 40. In addition to this "exclusive benefit rule," a finding that ERISA applies will also require that the Plan comply with the "noninurement rule." The non-inurement rule provides, in relevant part, that "... the assets of a plan shall never inure to the benefit of any employer ..." 29 U.S.C. § 1103(c)(1). The Plaintiffs argue that the Plan Assets may never become property of the Debtors' bankruptcy estate because to do so would cause the Plan Assets to inure to Debtors' benefit and, thus, violate the non-inurement rule. Complaint, ¶ 42.

The Debtors filed for protection under chapter 11 on April 2, 2007. On June 20, 2007, Plaintiffs, commenced this adversary proceeding seeking an order:

1. Certifying the Beneficiaries as a class under Rule 7023, appointing the Plaintiffs as representatives of the class and appointing ... class counsel;

2. Declaring that the Plan does not meet the definition of a top hat plan under ERISA;

3. Declaring that the Plan and the Trust are subject to all of the substantive protections afforded by ERISA including, but not limited to, the "exclusive benefit rule" and the "non-inurement rule"; and that such provisions are implied into the Plan and Trust by operation of law;

4. Declaring that the Plan Assets are held in trust for the exclusive benefit of the Beneficiaries;

5. Declaring that the Plan Assets are not property of any of the Debtors' bankruptcy estates 6. Ordering distribution of the Plan Assets to the Beneficiaries consistent with ERISA's substantive provisions;

7. Alternatively, imposing a trust or equitable lien upon the Plan Assets for the exclusive benefit of the Beneficiaries and ordering distribution consistent with such trust and/or lien;

8. Alternatively, reforming the terms of the Plan and/or the Trust to make them consistent with, and import the terms of, ERISA's substantive protections and to provide that the Plan Assets are held in trust for the exclusive benefit of the Beneficiaries and ordering distribution consistent with such trust;

9. Awarding to the Plaintiffs the amount of their attorneys fees and costs incurred in investigating and prosecuting this action; inter alia, under 29 U.S.C. § 1132(g) and finding that such award constitutes an administrative expense of the Debtor's estates; and

10. Alternatively, and only if the Court finds the Plan to be a top hat plan, finding that only general creditors of New Century (and no other Debtor) share with the Beneficiaries in the Plan Assets, and defining "general creditors" to exclude all secured creditors including as to deficiency claims.⁷

Complaint, pages 15-17.

Jurisdiction

Bankruptcy Court jurisdiction is codified in 28 U.S.C. § 1334 and 28 U.S.C. § 157. Section 157 divides Bankruptcy Court jurisdiction into "core" and "noncore" proceedings. In core proceedings, the Bankruptcy Court assumes the role of a court of first instance with comprehensive power to hear, decide and enter final orders and judgments, and if a matter is non-core, the Bankruptcy Court is permitted only to hear the dispute and submit "proposed findings of facts and conclusions of law to the district court." Halper v. Halper, 164 F.3d 830, 836 (3rd Cir.1999). The Bankruptcy Court must determine, on its own motion or on the "timely motion of a party," whether a proceeding comes within the court's core or non-core jurisdiction. 28 U.S.C. § 157(c)(1). "... [A]bsent the parties' allegations, the bankruptcy court is required in all cases...