In re Stone & Webster, Inc.

• Decision Date: 14 November 2002
• Docket Number: No. 00-02142 PJW.,00-02142 PJW.
• Citation: 286 B.R. 532
• Parties: In re STONE & WEBSTER, INCORPORATED, et al., Debtors.
• Court: U.S. Bankruptcy Court — District of Delaware

286 B.R. 532

In re STONE & WEBSTER, INCORPORATED, et al., Debtors.

No. 00-02142 PJW.

United States Bankruptcy Court, D. Delaware.

November 14, 2002.

Adam G. Landis, Kathleen P. Makowski, Klett Rooney Lieber & Schorling, Wilmington, DE, Anthony Princi, Lorraine McGowen, Orrick, Herrington & Sutcliffe LLP, New York City, James E. Houpt, Lynn Trinka Ernce, Orrick, Herrington & Sutcliffe LLP, Sacramento, CA, Co-Counsel to the Official Committee of Unsecured Creditors.

Gregg M. Galardi, Eric M. Davis, Skadden, Arps, Slate, Meagher & Flom LLP, Wilmington, DE, for Debtors and Debtors-in-Possession.

Ian Connor Bifferato, Megan N. Harper, Bifferato, Bifferato & Gentilotti, Wilmington, DE, David F. Heroy, Michael F. Yetnikoff, Carmen H. Lonstein, Bell, Boyd & Lloyd LLC, Chicago, IL, Counsel to the Official Committee of Equity Security Holders of Stone & Webster, Inc.

MEMORANDUM OPINION

PETER J. WALSH, Bankruptcy Judge.

Before the Court is a motion for summary judgment (Doc. # 2856) ("Summary Judgment Motion") filed by the Official Committee of Equity Security Holders ("Equity Committee") in response to a motion for substantive consolidation (Doc. # 1900) ("Consolidation Motion") filed by the Official Committee of Unsecured Creditors ("Creditors' Committee"). For the reasons set forth below, the Summary Judgment Motion will be denied and the Consolidation Motion will be granted in part.

BACKGROUND

Stone & Webster, Incorporated ("SWINC") and 72 direct and indirect subsidiaries filed voluntary Chapter 11 petitions on June 2, 2000. The Chapter 11 cases were consolidated for administrative purposes. Prior to the commencement of the Chapter 11 cases, SWINC and its subsidiaries were engaged in providing professional engineering, construction, and consulting services worldwide. Additionally, certain subsidiaries owned and operated cold storage warehouses in the United States.

More specifically, SWINC is a Delaware corporation that exists as a holding company, owning, directly or indirectly, the 72 affiliated debtors in this case, and having no other function. SWINC also owns, directly or indirectly, 25 non-debtor entities organized under foreign laws and operating outside the United States. Directly, SWINC owns Stone & Webster Engineers & Constructors, Inc. ("SWE & C"), which directly owns Stone & Webster Engineering Corporation ("SWEC"). SWE & C is primarily a holding company owning, directly or indirectly, the various engineering companies in the SWINC empire. SWEC is the principal operating subsidiary.

On July 17, 2000, SWINC sold virtually all its assets to a designee of the Shaw Group, Inc. ("Shaw") for cash and an assumption of virtually all of SWINC's ordinary course trade debt and balance sheet liabilities. SWINC's remaining assets consist of the following: its share of the proceeds from the Shaw sale, certain project contracts excluded from the Shaw sale, receivables related to completed or substantially completed contracts, litigation causes of action, stock in certain subsidiaries, and SWINC's interest in its pension plan.

On August 10, 2001, the Creditors' Committee filed a proposed plan (Doc. # 1902) (the "Plan") that calls for substantive consolidation of SWINC and its 72 direct and indirect subsidiaries into one estate.

With the filing of its Plan the Creditors' Committee filed its Consolidation Motion, which asks this Court to conclude that the applicable tests governing substantive consolidation are satisfied. In that motion, the Creditors' Committee sets forth the following factual bases for its position that substantive consolidation is appropriate.¹

(1) Though each Debtor maintained separate books and records for internal purposes, financial reporting was done on a consolidated basis. Additionally, there was a sharing of assets such as computer software and engineering tools for which the customer was not separately billed by the entity whose assets were used. SWINC also guaranteed most of the other Debtors' major construction projects, making the existence of the subsidiaries dependent on an affiliation with SWINC.

(2) Over 17% of the proofs of claims filed in this case appear to be duplicates, filed against SWINC and one or more of its co-debtors. The Creditors' Committee believes this indicates creditors do not know which Debtor is responsible for satisfying their claims. Further, over 25% of the proofs of claims were filed by employees seeking back wages. Most were filed against the Debtor for whom the employee worked and SWINC, or solely against SWINC. Letters to employees regarding compensation or benefits were sent on SWINC letterhead with, at most, a stamp at the bottom of the page identifying the affiliated entity.

(3) Utility services were shared by the Debtors and only six of the 73 had contracts with utility companies. There was also shared management as each affiliated entity's board of directors was either partially or wholly composed of SWINC employees, officers, or directors. In-house legal and treasury services were performed for all Debtors by SWINC's legal and treasury departments. Office space was also shared.

(4) A consolidated cash management system was in place, which led to cash flowing freely, at SWINC's discretion, between Debtors in accordance with their needs. Rather than each Debtor having its own bank account, there were only a small number of accounts, leading to intermingling of funds. Finally, the proceeds from the Shaw sale were never allocated to each Debtor purchased.

On September 7, 2001, creditor Marine Yankee Atomic Power Co. filed objections to the Consolidation Motion and to the Plan. The objections are based, in part, on the assertion that substantive consolidation is no longer an available remedy to bankruptcy courts in light of the Supreme Court's decision in Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., et al., 527 U.S. 308, 119 S.Ct. 1961, 144 L.Ed.2d 319 (1999). One week later, the Equity Committee filed a competing proposed plan. That plan would treat SWINC and each of its subsidiary debtors as separate, non-consolidated entities.

SWINC filed its proposed plan on March 15, 2002. The plan filed by SWINC proposes the substantive consolidation the debtors into two estates, one consisting of SWINC and certain of its affiliates and subsidiaries, and the other consisting of SWE & C and SWEC and the remaining affiliates and subsidiaries.² On May 29, 2002, the Equity Committee filed its Summary Judgment Motion requesting that this Court hold that Grupo Mexicano prohibits a bankruptcy court from ordering substantive consolidation, rendering the plans proposed by the Creditors' Committee and SWINC non-confirmable.

Whether substantive consolidation ultimately takes place in this case has a significant impact on the creditors. According to the Creditors' Committee, under the Equity Committee's plan, SWINC's creditors will enjoy a 100% recovery and its shareholders will receive in excess of $3 per share while SWEC's creditors will receive no more than 7 cents on the dollar. With substantive consolidation, creditors of all debtors will receive significant recovery from aggregated estates.

The Equity Committee's Summary Judgment Motion has resulted in extensive briefing not limited to the Equity Committee and the Creditors' Committee. SWINC and creditor Federal Insurance Company have also submitted briefs in opposition to the Equity Committee's position.³

DISCUSSION

Legal Standard for Summary Judgment and the Committees' Positions

Summary judgment is appropriate when the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). Therefore, the Equity Committee bears the initial burden of demonstrating the absence of material issues of fact. Id. When deciding a motion for summary judgment, the court views the facts, and all permissible inferences from those facts, in the light most favorable to the non-moving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-588, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). Where the record could not lead a reasonable trier of fact to find for the non-moving party, disposition by summary judgment is appropriate. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

The Summary Judgment Motion does not rely on the particular facts of these Debtors' affairs. Instead, the Equity Committee asserts that summary judgment should be granted because as a matter of law this Court is without authority to order the remedy of substantive consolidation as a result of the Supreme Court's decision in Grupo Mexicano. The Equity Committee states its position as follows:

In Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308, 119 S.Ct. 1961, 144 L.Ed.2d 319 (1999), the Supreme Court held that, in the absence of a specific statute expanding the court's jurisdiction, a U.S. district court's equitable power is limited to granting remedies actually administered by the English Chancery Courts in the late 18th Century. None of the Respondents articulates a statutory or historical basis for a bankruptcy court to grant substantive consolidation as sought by the Creditors' Committee in the Consolidation Motion. Absent such a basis, substantive consolidation cannot be granted.⁴

Equity Committee's Amended Reply (Doc. # 3214), p. 1.

In response, the Creditors' Committee argues that "the functional equivalent of substantive consolidation in bankruptcy, and numerous similar remedies in non-bankruptcy cases, were quite familiar to the English Court of Chancery in 1789." Creditors' Committee Opposition (Doc. # 2988), p. 2.

The Equity Committee and the Creditors' Committee have engaged in a heavy exchange of case citations and commentaries...