Matter of Baldwin-United Corp., Bankruptcy No. 1-83-02495.
| Decision Date | 13 December 1985 |
| Docket Number | Bankruptcy No. 1-83-02495. |
| Parties | In the Matter of BALDWIN-UNITED CORPORATION, D.H. Baldwin Company, et al., Debtors. |
| Court | U.S. Bankruptcy Court — Southern District of Ohio |
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Richard Parker, O'Melveny & Myers, Washington, D.C., Robert White, O'Melveny & Myers, Los Angeles, Cal., Attys., for debtors Baldwin-United Corp. and D.H. Baldwin Co., et al.
Eva H. Posman, Gaston, Snow, Beekman & Bogue, New York City, for Paine Webber, Inc.
Lawrence J. Fox, Drinker, Biddle & Reath, Philadelphia, Pa., for W.H. Newbold's & Sons.
Lloyd Clareman, Finley, Kumble, Wagner, Heine, Underberg, Manley & Casey, New York City, for Shearson Lehman/American Express, Inc., Robinson-Humphrey Co. & American Express, Inc.
Richard Levy, Jr., Esanu, Katsky, Korins & Siger, New York City, for Planco, Inc.
These Chapter 11 cases are before the Court pursuant to the Debtors' objections to claims filed by Edward D. Jones and Company (Claim 7232), J.C. Bradford and Company (Claim 7109), Paine Webber, Inc., et al (Claim 7022), Piper, Jaffrey and Hopwood, Inc., et al (Claims 6963, 6864, 6965 and 6472), Planco, Inc. (Claim 7108), Robinson Humphrey/American Express, Inc. (Claims 7195 and 7197), Shearson Lehman/American Express, Inc. (Claims 7196 and 7198), and W.H. Newbold's Sons and Company (Claim 7074) (hereinafter, the "Brokers").1
Beginning in 1979, certain insurance companies owned by the Debtors began marketing a product known as a single premium deferred annuity ("SPDA"). Approximately 75% of these SPDAs were sold through broker-dealers. An SPDA was purchased with a one-time payment to the insurance company (the average payment was approximately $23,000) (See, Transcript of Proceedings, Doc. 21-41 at 159). In turn, the insurance company agreed to pay back that amount with interest at a date in the future. The insurance companies agreed to pay a high guaranteed interest rate for the first year and a variable rate thereafter with a guaranteed minimum of 7.5% for years two through ten and 4% thereafter.
Through a series of events which have been documented in the Court-appointed Examiner's Report filed in these cases (See, Consolidated Case No. 1-83-02495, Doc. # 1453), the insurance companies were placed in rehabilitation proceedings by the state insurance regulators of Arkansas and Indiana (the "Rehabilitators") on July 13, 1983.2 A rehabilitation plan was adopted by both rehabilitation courts in March of 1984 and became effective May 1, 1984. That plan provides for a 100% return of principal and accumulated interest to July 13, 1983; a 100% return of the interest rate guaranteed each policyholder for the first year the policy was owned; 9.5% interest on the July 13, 1983 accumulated value through May 1, 1984; and a 5.5% interest rate thereafter until November 1, 1987 or completion of the Rehabilitation Plan.
On September 28, 1984, the Rehabilitators each filed proofs of claim in these Chapter 11 cases for "not less than $2,000,000,000" alleging that Debtors had improperly obtained cash from the insurance companies in exchange for securities issued by the Debtors and affiliated companies ("the Affiliate Securities") and held by the insurance companies. These Affiliate Securities were found by the Arkansas rehabilitation court to be of uncertain value and liquidity. In response to the Rehabilitators' proofs of claim, the Debtors filed counterclaims for the return of approximately $1.2 billion in preferences and fraudulent conveyances held by the insurance companies. There followed several months of negotiations culminating in a settlement of all claims between the Debtors and the Rehabilitators. That settlement was approved by both Rehabilitation Courts and the Bankruptcy Court in February of 1985 and amended in November of 1985.3 As part of that settlement, the Debtors will pay approximately $170 million to the Rehabilitators and the Rehabilitators will return the Affiliate Securities to the Debtors.
Beginning September 29, 1983, three days after the involuntary bankruptcy petitions were filed against the Debtors, holders of SPDAs filed class-action suits against the broker-dealers who marketed the SPDAs. Eventually, 40 actions pending in nine federal jurisdictions were transferred and assigned to the Honorable Charles Brieant, United States District Judge for the Southern District of New York, for consolidated proceedings under 28 U.S.C. § 1407. In re Baldwin-United Corp. Litigation, No. 581, 581 F.Supp. 739 (J.P.M.L.1984) Due to the automatic stay provisions of 11 U.S.C. § 362, Baldwin was not named as a defendant in any of the actions.
Prior to the July 25, 1984 bar date for filing proofs of claim in these bankruptcy cases, Paine Webber, Inc., filed a proof of claim for $700 million against Baldwin-United for indemnity and contribution in connection with the MDL 581 actions, as well as a lawsuit filed against it by the Commonwealth of Massachusetts and other proceedings that "have been or may be commenced by various state and federal regulatory bodies." (Cl.Ex. 63, PW Ex. H at 5)
Claim No. 7108 filed by Planco, Inc. is for not less than $30 million and seeks indemnity and/or contribution in connection with 12 of the lawsuits consolidated in MDL 581. (Cl.Ex. 65, PL.Ex. Q) Planco, Inc. apparently served as consultant to the insurance subsidiaries with regard to the SPDAs and did not actually market the policies. (See, Affidavit on Behalf of Planco, PL.Ex. R)
Robinson Humphrey/American Express filed proofs of claim for indemnity and contribution in an undetermined amount in connection with two actions consolidated in MDL 581, three Alabama state court actions and one North Carolina state court suit. (Cl.Exs. 59, 61; RH Exs. H, I)
Shearson Lehman/American Express filed proofs of claim for indemnity and contribution in an undetermined amount in connection with four MDL 581 suits and five state court suits.
W.H. Newbold's Sons and Company filed a proof of claim for an undetermined amount for indemnity and contribution in connection with one of the MDL 581 suits. (Cl.Ex. 64, WHN Ex. E)
Each claim is contingent and unliquidated in that there has been no determination in MDL 581 or any other proceeding that the Brokers are liable to the policyholders and it is undisputed that none of the Brokers, with the exception of Planco, Inc.,4 have yet paid any amount to any policyholder or any State in connection with the suits or regulatory actions currently pending. Likewise, there has been no determination of the Debtors' liability, if any, to the Brokers. Pursuant to 11 U.S.C. §§ 105 and 362 and previous orders of this Court and the U.S. District Court for the Southern District of Ohio, the Brokers are prohibited from filing or proceeding on third-party complaints against the Debtors in MDL 581. (See, Baldwin-United Corp. v. Paine Webber Group, Inc., Adv. No. 1-85-0251 (Bankr.S.D. Ohio, July 30, 1985), (Newsome, J.), aff'd, C-1-85-1509, ___ B.R. ___ (S.D. Ohio, October 22, 1985) (Porter, J.)
Certain holders of SPDAs also filed proofs of claim in these bankruptcy cases on behalf of themselves and on behalf of a "class" of SPDA holders. The Debtors objected to those "class claims." By Order of August 7, 1985, this Court disallowed the claims insofar as they purported to be filed on behalf of a class.
The Debtors have objected to the Brokers' claims on four grounds. First, Debtors argue that as a result of Rehabilitation Plans adopted by the Courts in Arkansas and Indiana, the only loss suffered by the policyholders is lost interest resulting from the Rehabilitation proceedings and that such interest, accruing post-petition, is not recoverable under 11 U.S.C. § 502(b)(2). Therefore, Debtors assert, the claim must be disallowed under 11 U.S.C. § 502(e)(1)(A).
Second, since no judgments have been entered against the Brokers in MDL 581 or any other action, nor have the Brokers paid the policyholders with respect to the MDL claims or any other claims arising from the sale of SPDAs, the Debtors ask that the claims be disallowed pursuant to 11 U.S.C. § 502(e)(1)(B). In addition, since the Debtors will pay, under the terms of their settlement agreement with the Insurance Commissioners of Arkansas and Indiana, $170+ million to the Rehabilitators which will be distributed to policyholders, the Debtors urge that this settlement be credited toward any contribution claim so as to prevent double recovery from the Debtors' estates.
Third, Debtors argue that neither indemnity nor contribution is available to the Brokers under either federal or state law and thus these claims should be disallowed under 11 U.S.C. § 502(b)(1).
Finally, the Debtors assert that the fixing or liquidating of any liability between the Brokers and policyholders and the Debtors and Brokers would unduly delay the closing of the case. They therefore request an estimation of the claims pursuant to 11 U.S.C. § 502(c) in the event the claims are not disallowed.
After holding a pre-trial conference on the objections, the Court reserved ruling on the legal issues raised under 11 U.S.C. § 502(e) and scheduled hearings in the form of a summary trial on the estimation of the claims for December 3 and 4, 1985.
We now turn to the Debtors' arguments on disallowance and the Brokers' responses which we heard and took under submission on September 30, 1985.
Section 502(e)(1) requires the Court to "disallow any claim for reimbursement or contribution of an entity that is liable with the debtor on . . . the claim of a creditor" under certain circumstances.
Initially the Brokers argue that § 502(e) is not applicable to them on the ground that the language "entity that is liable with the debtor on a claim" should not be construed to include joint...
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