Renco Grp., Inc. v. Wilmington Trust, Nat'l Ass'n (In re Magnesium Corp. of Am.)

• Decision Date: 30 March 2018
• Docket Number: Adv. Pro. 16–01073 (MKV),Case No. 01–14312 (MKV) (Jointly Administered)
• Citation: 583 B.R. 637
• Parties: IN RE: MAGNESIUM CORPORATION OF AMERICA, et al., Debtors. The Renco Group, Inc., Plaintiff, v. Wilmington Trust, National Association, in Its Capacity as Indenture Trustee Under the Indenture Dated as of July 1, 1996 Among Renco Metals, Inc., Issuer, Magnesium Corporation of America and Sabel Industries, Inc., Guarantors, and Wilmington Trust, National Association, Successor Trustee, Relating to 11 ½% Senior Notes Due 2003, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

583 B.R. 637

IN RE: MAGNESIUM CORPORATION OF AMERICA, et al.,¹ Debtors.The Renco Group, Inc., Plaintiff,

v.Wilmington Trust, National Association, in Its Capacity as Indenture Trustee Under the Indenture Dated as of July 1, 1996 Among Renco Metals, Inc., Issuer, Magnesium Corporation of America and Sabel Industries, Inc., Guarantors, and Wilmington Trust, National Association, Successor Trustee, Relating to 11 ½% Senior Notes Due 2003, Defendant.

Case No. 01–14312 (MKV) (Jointly Administered)

Adv. Pro. 16–01073 (MKV)

United States Bankruptcy Court, S.D. New York.

Signed March 30, 2018

KASOWITZ, BENSON, TORRES & FRIEDMAN LLP, Attorneys for The Renco Group, Inc., 1633 Broadway, New York, New York 10019, By: David M. Friedman, David S. Rosen, Adam L. Shiff, Alycia Regan Benenati, Shai Schmidt

BROWN RUDNICK LLP, Counsel to the Indenture Trustee, One Financial Center, Boston, Massachusetts 02111, By: Jeffrey L. Jonas, James W. Stoll, Brian T. Rice, Brian M. Alosco

MEMORANDUM OPINION AND ORDER GRANTING MOTION TO DISMISS

MARY KAY VYSKOCIL, UNITED STATES BANKRUPTCY JUDGE

The Renco Group, Inc. (the "Renco Group") commenced this action seeking to disallow nearly $170 million in claims (the "Bond Claims")² filed against Renco Metals, Inc. ("Metals") and Magnesium Corporation of America ("MagCorp" and together with Metals, the "Debtors")³ by a predecessor in interest to Wilmington Trust, N.A., in its capacity as indenture trustee ("Wilmington Trust")⁴ pursuant to an indenture dated as of July 1, 1996 (the "Indenture"), pursuant to which Metals issued certain bonds due in 2003 (the "Bonds"), and on behalf of certain holders of the Bonds (the "Bondholders"). See Complaint (the "Complaint" or "Compl.") [ECF No. 1]. Wilmington Trust now moves to dismiss this adversary proceeding. See Motion to Dismiss [ECF No. 18]. After the Court heard oral argument on the Motion to Dismiss (the "First Hearing" or "First Hr'g"), the Second Circuit issued an order affirming a District Court judgment in a related litigation, which counsel to Wilmington Trust had argued at the First Hearing could impact the outcome of its Motion to Dismiss. This Court then directed supplemental briefing on the impact, if any, of the Second Circuit's decision, and thereafter, heard argument on the issues addressed in the supplemental briefing (the "Supplemental Hearing" or "Suppl. Hr'g"). Having considered all arguments raised by the parties, for the reasons set forth below, the Motion to Dismiss is granted.

JURISDICTION AND VENUE

This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 1334(b) and 157(a) and the Amended Standing Order of Referral of Cases to Bankruptcy Judges of the United States District Court for the Southern District of New York (M–431), dated January 31, 2012 (Preska, C.J.). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409. The Renco Group and Wilmington Trust consented to the entry of a final order or judgment by this Court at the First Hearing. See First Hr'g Tr. 5:1–12; 6:15–20 [ECF No. 31].

BACKGROUND

The extensive factual, procedural and legal history of the underlying bankruptcy cases and the associated litigations spans approximately 17 years. The Court therefore limits its discussion to the facts most directly relevant to the Motion to Dismiss.

On August 2, 2001 (the "Petition Date"), the Debtors each filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code and, on the following day, the Honorable Robert E. Gerber⁵ ordered that the cases be jointly administered. See Order Pursuant to Bankruptcy Rule 1015 Directing Joint Administration of Chapter 11 Cases [Case No. 01–14312, ECF No. 5]. The following month, the cases were converted to cases under chapter 7 of the Bankruptcy Code, see Order Converting Chapter 11 Cases to Cases Under Chapter 7 [Case No. 01–14312, ECF No. 419], and Lee E. Buchwald was appointed as the chapter 7 trustee (the "Trustee"). See Appointment of Interim Trustee and Trustee and Designation of Required Bond [Case No. 01–14312, ECF No. 421].

A. Claims Against the Debtors

At the time the Renco Group commenced this adversary proceeding, hundreds of claims had been filed against the Debtors. The principal liabilities included the Bond Claims and various unliquidated environmental claims (collectively, the "Environmental Claims") asserted by, inter alia , the United States Environmental Protection Agency ("EPA") and the Department of Interior (the "DOI," and together with EPA, the "Government").⁶ See Twenty–Seventh Interim Status Report of Chapter 7 Trustee , filed on May 10, 2016 (the 27th Interim Report") ¶ 52 [Case No. 01–14312, ECF No. 708].

The Bond Claims arise out of a $150 million public bond offering by Metals in 1996 pursuant to the Indenture (the "1996 Bond Offering"), the obligations under which were guaranteed by MagCorp. See Wilmington Trust Proofs of Claim ¶¶ 8–14; Compl. ¶¶ 12–20. According to the Wilmington Trust Proofs of Claim and the Complaint, as of the Petition Date, the aggregate amount owing to the Bondholders under the Indenture totaled $150 million in principal and nearly $19.6 million in interest. See Wilmington Trust Proofs of Claim ¶ 8; Compl. ¶ 19. The Environmental Claims derive from, inter alia, alleged (i) violation(s) of the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act and (ii) right-of-way and rent liabilities allegedly totaling over $6 million.

At the time the Complaint was filed, the Debtors' Claims Registers reflected claims totaling "approximately $670 million." Compl. ¶ 29. This amount included, inter alia , the two Bond Claims and multiple claims filed by the Pension Benefit Guaranty Corporation. It did not include the Environmental Claims which were significant, but unliquidated. See 27th Interim Report ¶ 52. Debtors' bankruptcy schedules also indicated approximately $5 million in trade debt. See 27th Interim Report ¶ 52.

B. Fraudulent Transfer Litigation

On July 31, 2003, the Trustee, on behalf of the Debtors, commenced a fraudulent transfer action (the "Fraudulent Transfer Litigation") against, inter alia , the Renco Group and its majority shareholder, Ira Rennert ("Rennert").⁷ See Amended Complaint (the "Fr. Transfer Compl.") [Adv. Pro. No. 03–06559, ECF No. 2]. The action arose out of the 1996 Bond Offering and sought to recover certain dividend payments made to, inter alia , the Renco Group and Rennert that allegedly were avoidable under the Bankruptcy Code and under New York state law. See Fr. Transfer Compl. ¶¶ 115–50, 527–32, 609–14, 615–32, 639–43. The Fraudulent Transfer Litigation was first brought as an adversary proceeding before the Bankruptcy Court (Adv. Pro. No. 03–6559 (MKV) ), and thereafter, the District Court granted a motion to withdraw reference to the Bankruptcy Court. See Order [Adv. Pro. No. 03–06559, ECF No. 207].

The Fraudulent Transfer Litigation was subsequently assigned to, and presided over, by the Honorable Alison J. Nathan (Case No. 13–cv–7948), who ultimately conducted a month-long trial. On February 27, 2015, the jury returned a verdict in the Trustee's favor, consisting of, inter alia , a $101 million damages award against the Renco Group and a $16.2 million damages award against Rennert. On March 16, 2015, Judge Nathan issued a Memorandum and Order awarding the Trustee pre-judgment interest at the rate of 6% per annum from the Petition Date. See Memorandum and Order [Case No. 13–cv–7948, ECF No. 342]. The pre-judgment interest increased the overall judgment in that action to $214,697,948.44 (the "Fraudulent Transfer Judgment").

The Renco Group and Rennert appealed the Fraudulent Transfer Judgment to the Second Circuit, and on March 8, 2017, the Second Circuit issued an order, inter alia , denying the appeal and affirming the Fraudulent Transfer Judgment. See Buchwald v. Renco Grp., Inc. (In re Magnesium Corp. of Am.) , 682 Fed.Appx. 24 (2d Cir. 2017) (the "Summary Order"). On October 10, 2017, the United States Supreme Court denied certiorari with regard to the Summary Order and on October 12, 2017, the Second Circuit issued a judgment mandate. See Renco Grp., Inc. v. Buchwald (In re Magnesium Corp. of Am.) , ––– U.S. ––––, 138 S.Ct. 329, 199 L.Ed. 2d 213 (2017).

C. The Renco Group's February 2015 Motion for Leave to Object to Creditors' Claims in the Debtors' Bankruptcy Cases

While the Fraudulent Transfer Litigation was pending in the District Court, the Renco Group began taking steps to challenge claims asserted against the Debtors. On December 30, 2014, the Renco Group sent a letter to the Trustee demanding that the Trustee begin bringing objections to claims, alleging, inter alia , that: (i) all of the claims asserted against Metals are subject to disallowance for a variety of reasons and (ii) expungement of the claims would have a significant impact with respect to the Fraudulent Transfer Litigation. See Motion for Leave to Object to Creditors' Claims (the "Standing Motion" or "Standing Mot.") Ex. C [Case No. 01–14312, ECF No. 681]. The Trustee responded by letter dated January 9, 2015 stating, inter alia , that: (i) the estates lacked the sufficient funds to litigate objections and (ii) he believed that the Renco Group's demand that he file certain objections was part of its litigation strategy designed to undermine the then pending Fraudulent Transfer Litigation. See Standing Mot. Ex. D.

Following its unsuccessful efforts to persuade the Trustee, the Renco Group sought leave from the Bankruptcy Court for standing and authority pursuant to section 502(a) of the Bankruptcy Code to object to, and file motions with respect to, claims filed or otherwise asserted against the Debtors. See Standing Mot. The Renco Group argued, inter alia , that by refusing to object to claims, the Trustee had refused to fulfill his responsibilities with respect to claims...