In re Railworks Corp.
| Decision Date | 05 May 2005 |
| Docket Number | Bankruptcy No. 01-64468-SD.,Bankruptcy No. 01-64480-SD.,Bankruptcy No. 01-64482-SD.,Bankruptcy No. 01-64478-SD.,Bankruptcy No. 01-64485-SD.,Bankruptcy No. 01-64466-SD.,Bankruptcy No. 01-64463-SD.,Bankruptcy No. 01-64473-SD.,Adversary No. 03-5784.,Bankruptcy No. 01-64471-SD.,Bankruptcy No. 01-64483-SD.,Bankruptcy No. 01-64481-SD.,Bankruptcy No. 01-64474-SD.,Bankruptcy No. 01-64477-SD.,Bankruptcy No. 01-64469-SD.,Adversary No. 03-5781.,Bankruptcy No. 01-64475-SD.,Bankruptcy No. 01-64467-SD.,Bankruptcy No. 01-64470-SD.,Bankruptcy No. 01-64476-SD.,Bankruptcy No. 01-64484-SD.,Bankruptcy No. 01-64464-SD.,Bankruptcy No. 01-64479-SD.,Bankruptcy No. 01-64472-SD.,Adversary No. 03-5795.,Bankruptcy No. 01-64465-SD. |
| Citation | 325 B.R. 709 |
| Parties | In re RAILWORKS CORPORATION, et al., Debtors. Zvi Guttman, Litigation Trustee, v. Roy O. Martin, III, et al.; Harsco Corporation, et al.; Craig A. Simmons, et al., Defendants. |
| Court | U.S. Bankruptcy Court — District of Maryland |
Richard M. Goldberg, Erin E. Johnson, Shapiro, Sher, Guinot & Sandler, Baltimore, MD, for Zvi Guttman.
Douglas Robert Gorius, Esquire, Lori S. Simpson, Esquire, Bishop, Daneman & Simpson, LLC, Baltimore, MD, Brandon A. Brown, Esquire, Louis M. Phillips, Esquire, Gordon, Arata, McCollam, Duplantis & Eagan, L.L.P., Baton Rouge, LA, J. Stephen Simms, Esquire, Simms Showers LLP, Baltimore, MD, Randall L. Wilmore, Esquire, Bradley L. Drell, Esquire, Gregory Upton, Esquire, J. Grave Theus, Jr., Esquire, Gold, Weems, Bruser, Sues & Rundell, Alexandria, LA, Linda V. Donhauser, Esquire, Matthew G. Summers, Esquire, Miles & Stockbridge P.C., Baltimore, MD, for Defendants.
Mark Neal, Assistant U.S. Trustee, Office of the United States Trustee, Baltimore, MD, U.S. Trustee.
Defendants' motions to dismiss raise two issues. First, does the Litigation Trustee under the Debtors' confirmed plan of reorganization have standing to bring these fraudulent conveyance avoidance actions under 11 U.S.C. § 544(b)? Second, does this court have subject matter jurisdiction over these actions after the plan has been confirmed and the bankruptcy estate terminated?
On September 20, 2001, Railworks Corporation and 21 of its affiliates (collectively the "Debtors") filed voluntary petitions for relief under Chapter 11. Following negotiations with various creditor constituencies, Debtors filed their Second Amended Plan of Joint Reorganization (the "Plan") on August 8, 2002. (Dkt. No. 1095). The Plan was confirmed on October 1, 2002. (Dkt. No. 1274).
Section 5 of the Plan creates a Litigation Trust to which certain claims will be conveyed.
As of the Effective Date, if, and only if, Class 9 votes to accept the Plan, the Litigation Trust shall be created, all Litigation Trust Claims shall be transferred thereto and the Creditors' Committee shall be entitled to appoint the Litigation Trustee. If Class 9 votes to reject the Plan, the Litigation Trust shall not be created, and all claims or Causes of Action that were to constitute Litigation Trust Claims shall remain held by, and for the benefit of, the Reorganized Debtors. The Litigation Trust shall be funded by the Litigation Trust Financing. In no event shall the Debtors or the Reorganized Debtors have any obligation to fund the Litigation Trust or its activities beyond the Litigation Trust Financing. Proceeds from Litigation Trust Claims held by the Litigation Trust shall be distributed to holders of Class 9 Claims entitled to receive distributions from the Litigation Trust in accordance with the terms and conditions of the Litigation Trust Agreement, subject to applicable terms and conditions of the Plan.
Plan at § 5.25. Litigation Trust Claims are defined by the Plan to mean:
claims for the avoidance of any transfer by or obligation of the Estates or the Debtors under chapter 5 of the Bankruptcy Code or the recovery of value of such transfer, provided, however, that no such claim shall exist against a Creditor whose claim was paid pursuant to orders authorizing the assumption of executory contracts or unexpired leases and orders authorizing the payment of certain pre-petition obligations to critical vendors and service providers.
Plan at § 1.85 (emphasis in the original). Class 9 Claims are Unsecured Claims. Plan at § 3.1. Since Class 9 voted to accept the Plan, the Litigation Trust was created. Section 4.10 of the Plan sets forth the treatment of allowed Unsecured Claims. In additional to a stock distribution, each holder of an allowed Unsecured Claim will receive a pro rata share of the net recoveries from Litigation Trust Claims.
(a) (i) Treatment. Each holder of an Allowed Unsecured Claim shall receive in full satisfaction, settlement and release, and discharge of and in exchange for such Allowed Unsecured Claim (A) its Pro Rata Share of the Class 9 Common Stock Distribution (subject to Section 4.10(a)(ii) below), and (B) its Pro Rata Share of any recoveries from Litigation Trust Claims held by the Litigation Trust. Notwithstanding the foregoing, if Class 9 votes to reject the Plan, then holders of Allowed Unsecured Claims shall not received any distributions under the Plan.
(ii) Election to Receive Cash in Lieu of New Railworks Common Shares. Any holder of an Allowed Unsecured Claim who votes in favor of the Plan may elect to make the Class 9 Cash Election and, subject to Section 6.11 of the Plan, receive the Class 9 Cash Consideration in full satisfaction, settlement and release, and discharge of and in exchange for such Allowed Unsecured Claim.
Plan at § 4.10.
The Litigation Trust Agreement states that the Litigation Trustee "shall have the sole authority and ability to prosecute, settle and/or abandon the Litigation Trust Claims...." Litigation Trust Agreement, Dkt. No. 1257 at 2. In accordance with its purpose to pursue Litigation Trust Claims for the benefit of the unsecured claimants, id. at 1, on September 17, 2003, the Litigation Trustee, on behalf of the Trust, initiated these proceedings pursuant to 11 U.S.C. § 544(b) and relevant state fraudulent transfer statutes. Most Defendants have raised similar arguments challenging the standing of the Litigation Trustee to assert these claims and the authority of the bankruptcy court to hear them post-confirmation. For reasons of judicial economy, the court will address the standing and jurisdiction issues in a single opinion.
Defendants argue initially that the Litigation Trustee does not have standing to bring these fraudulent conveyance claims for three reasons. First, they contend that only a trustee has standing to assert these claims. For this contention, Defendants rely on Hartford Underwriters Insurance Co. v. Union Planters Bank, N.A. (In re Hartford), 530 U.S. 1, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000). In re Hartford held that the language of 11 U.S.C. § 506(c), which states the "trustee" may recover from property securing an allowed claim "the reasonable ... costs ... of preserving ... such property...," created only a right in the trustee to recover such costs, thereby preventing an administrative creditor of the estate from recovering on such a claim. Defendants extrapolate this argument to apply to 11 U.S.C. § 544(b) claims. Section 544(b) also specifically authorizes only the "trustee" to bring the avoidance actions described therein on behalf of the estate.
Second, Defendants maintain that the court may not authorize the Litigation Trustee to assert claims under its equitable authority, because the bankruptcy estate has terminated and ceases to exist. By raising this argument, Defendants' attempt to preempt Plaintiff's reliance on Official Committee of Unsecured Creditors of Cybergenics Corp. v. Chinery (Cybergenics III), 330 F.3d 548 (3d Cir.2003)1, which held that the bankruptcy court could use its equitable powers to authorize a creditors' committee to sue derivatively on behalf of the bankruptcy estate to recover certain fraudulent transfers. In Cybergenics III the creditors' committee sued while the debtor's case was pending and in the absence of a confirmed plan. Defendants conclude that any authority of this court to grant derivative standing terminated with the estate upon confirmation of Debtors' Plan.
Third, even if the court finds the Litigation Trustee has standing to assert the claims, either direct or derivative standing, Defendants argue that the instant claims are not within those allowed under 11 U.S.C. § 1123(b)(3), which provides that only claims belonging to the estate or to the debtor may be provided for in a plan of reorganization. For this argument, Defendants rely on the first Cybergenics opinion, Official Committee of Unsecured Creditors of Cybergenics Corp. v. Chinery (Cybergenics I), 226 F.3d 237 (3d Cir.2000). Cybergenics I holds that a fraudulent conveyance claim is not a personal asset of the debtor, such that it was sold as part of a sale of nearly all of the debtor's assets. Rather, a fraudulent transfer claim belongs to a creditor under state law, and under 11 U.S.C. § 544(b) may only be pursued in a bankruptcy case by the trustee or debtor in possession for the benefit of creditors.
Defendants' alternative ground for dismissal is that the court lacks subject matter jurisdiction over these complaints. If the court finds that the Litigation Trustee does have standing to bring these claims because the claims are properly within the scope of 11 U.S.C. § 1123(b)(3), Defendants argue that the bankruptcy court does not have jurisdiction to hear these proceedings since the estate has ceased to exist, and these matters are purely state law causes of action that are not related to the bankruptcy case. Plaintiff filed an omnibus response to the above arguments, in which he...
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