Mesabi Metallics Co. v. B. Riley FBR, Inc. (In re Essar Steel Minn.)
| Docket Number | 16-11626 (CTG),Adv. 18-50833 (CTG) |
| Decision Date | 23 June 2023 |
| Parties | In re: ESSAR STEEL MINNESOTA, LLC and ESML HOLDINGS, INC., Debtors. v. B. RILEY FBR, INC. f/k/a B. RILEY & CO., LLC, Defendant. MESABI METALLICS COMPANY LLC (f/k/a ESSAR STEEL MINNESOTA, LLC) and CHIPPEWA CAPITAL PARTNERS, LLC, Plaintiffs, Related Docket No. 10 |
| Court | U.S. Bankruptcy Court — District of Delaware |
Chapter 11 of the Bankruptcy Code depends on an important legal fiction. A successful chapter 11 reorganization (involving a single debtor) typically involves only one actual legal entity - the corporation chartered under state law that was the prepetition debtor. That same state-law legal entity serves as the debtor in possession during the bankruptcy and emerges at the end of the case as the reorganized debtor. Federal bankruptcy law, however, treats that entity as three different things. It is, first, the prepetition debtor before the petition date; second, the "debtor in possession" in the period between the petition date and the effective date of the confirmed plan; and third, the reorganized debtor upon its emergence from bankruptcy following the effective date.[1] The "separateness" of each of these three (fictional) "entities" is a central feature of federal bankruptcy law.
For creditors of a corporation that files for chapter 11, the time when their claim "arises" determines which bankruptcy law "entity" is liable on that claim and thus often turns out to be critical. Unsecured claims arising before the petition date run against the prepetition debtor. In the bankruptcy case, those are unsecured prepetition claims, and (unless entitled to statutory priority) are rarely paid in full. Claims that arise between the petition date and the effective date are typically entitled to administrative priority. But like prepetition claims, they are subject to being discharged at the end of the bankruptcy case. Claims that arise after the effective date are not "claims" in bankruptcy at all, which means they are not paid out of the bankruptcy estate. But those "claims" are not discharged in bankruptcy either. The creditor has all of the rights non-bankruptcy law otherwise provides to assert those claims against the reorganized debtor.
There are also limits on the power of each of these entities to bind its successors. An agreement entered into by the prepetition debtor in an executory contract may be rejected by the debtor in possession or, if it contains an ipso facto clause, may not be enforceable at all against a debtor in possession. A promise made by the debtor in possession, unless set forth in a plan of reorganization, will not bind the reorganized debtor. These broad principles of bankruptcy law, like most general legal principles, are subject to a variety of caveats and exceptions. But they provide an important starting point for considering the problem presented in this case.
This dispute is about the liability of the reorganized debtor on promises allegedly made before the effective date. The basic factual allegation in this adversary proceeding is that, the day before the plan became effective, the reorganized debtor (before having come into existence) and the entity that acquired it under the plan entered into an engagement with an investment bank that purported to bind both entities to pay a fee for capital that the investment bank would raise for the reorganized debtor.[2] The complaint further alleges that the investment bank is now seeking to enforce that agreement against the reorganized debtor and the new owner (which received a consensual third-party release under the plan) through an arbitration proceeding. The complaint contends that those efforts violate the discharge injunction and are barred by the terms of the plan.
The investment bank has moved to dismiss the complaint, arguing that it fails to state a claim under Rule 12(b)(6) (). The complaint, however, does state a claim for which relief may be granted. If the facts as alleged in the complaint are true, then (unless some defense is available) the defendant has indeed violated the discharge injunction and the terms of the plan. The motion to dismiss will therefore be denied.
That, however, is not the end of the story. The investment bank argues that the post-emergence actions of the reorganized debtor and its owner are sufficient to bind them to the otherwise discharged obligations. That may or may not be correct. For purposes of this motion to dismiss, the key point is that these facts are not alleged in the complaint. They therefore provide no basis for dismissing the complaint at this stage of the litigation.
Essar Steel was created to develop and operate an iron ore pellet production facility in northern Minnesota.[3] Essar Steel's parent was ESML Holdings.[4] Both entities filed chapter 11 petitions on July 8, 2016.[5]
In February 2017, Chippewa, which ultimately acquired the reorganized debtor under the terms of the confirmed plan engaged B. Riley as its financial advisor to advise it in connection with its proposed acquisition of the debtors.[6] Under the terms of the engagement agreement, Chippewa committed to pay B. Riley certain fees, including a "Success Fee," if Chippewa successfully closed "any transactions or series or combination of transactions that culminate[d] in [Chippewa] acquiring substantially all of the business assets of [the debtors]."[7] The engagement agreement was thereafter amended to provide that B. Riley would be entitled to a "Success Fee" in connection with transactions that raised capital for the reorganized debtor.[8]
In April 2017, following an auction, Chippewa was selected as the successful bidder to acquire the reorganized debtor under the terms of the proposed plan of reorganization.[9] Chippewa thereafter worked closely with the debtors and other interested parties to negotiate the plan terms.[10]
B. Riley, however, was retained only by Chippewa, not by Essar Steel. B. Riley accordingly did not serve as financial advisor to the debtor in possession. "[A]n application to employ [B. Riley] was never filed in the Chapter 11 Cases, and accordingly, the Court did not approve for [B. Riley] to be employed by the Debtors or paid from the Debtors' estates."[11]
The debtors' filed their third amended chapter 11 plan of reorganization on June 8, 2017.[12] B. Riley is alleged to have had notice of the plan; indeed, the complaint states that B. Riley filed a declaration in support of confirmation.[13] The plan set out a procedure by which those who hold administrative claims against the bankruptcy estate could file such claims - which are claims that must have been incurred "on or after the Petition Date and before the Effective Date"[14] - and set a deadline by which those claims must be filed.
Otherwise, the plan provides that claims against the debtors (whether prepetition or administrative) are both released by creditors and discharged.[15] In addition, under the terms of the plan, creditors who did not elect to opt out released not only their claims against the debtors (which were subject to the discharge in any event) but also consented to the release of any claims they might hold against Chippewa.[16] The plan and confirmation order each contain injunctions that operate to enjoin creditors from taking action to assert any claim that is released.[17]
The Court confirmed the debtors' third amended plan on June 13, 2017.[18]Thereafter, the debtors sent parties in interest a notice, informing them of the deadlines for filing claims as set forth in the plan.
The confirmed plan was set to become effective on December 22, 2017. It is alleged, however, that on the eve of the effective date the parties amended the B. Riley engagement agreement to provide that Mesabi, the reorganized debtor, would become bound (along with Chippewa) to pay the success fee for capital raised for the reorganized debtor.[19] The Complaint further alleges that B. Riley, despite being on notice of the administrative claim bar date, never filed a proof of claim or administrative claim in the bankruptcy cases by the February 5, 2018 bar date.[20]
The reorganized debtor closed on a $650 million construction financing loan in June 2018. B. Riley asserts that, under the terms of the parties' agreements, it is entitled to a success fee (after crediting amounts already paid pursuant to the agreement) of almost $17 million for the construction financing loan.[21]
Mesabi and Chippewa refused to pay the fee. In July 2018, B. Riley filed a statement of claim with the Financial Industry Regulatory Authority ("FINRA") against Mesabi and Chippewa seeking to recover on this claim.[22] After filing the FINRA statement of claim, B. Riley filed a separate complaint against Mesabi and Chippewa, in the United States District Court for the District of Minnesota, asking the court to enter a temporary restraining order (and subsequently a preliminary injunction) pending the outcome of the FINRA arbitration.[23]
On September 24, 2018, Mesabi and Chippewa filed this adversary proceeding against B. Riley for civil contempt, breach of contract, and a declaratory judgment that the FINRA arbitration and the Minnesota lawsuit violate the debtors' plan, this Court's confirmation order, and the Bankruptcy Code.[24]
In October 2018, B. Riley moved to dismiss the complaint.[25] In February 2019, the Court granted B Riley's motion to dismiss for want of subject-matter jurisdiction.[26] The district court certified a direct appeal to the Third Circuit, which held that this case did...
To continue reading
Request your trial