Wci Steel, Inc. v. Wilmington Trust Co.

• Citation: 338 B.R. 1
• Decision Date: 23 September 2005
• Docket Number: No. 4:05 CV 1386.,No. 4:05 CV 1388.,4:05 CV 1386.,4:05 CV 1388.
• Parties: WCI STEEL, INC. et al., Appellants, v. WILMINGTON TRUST COMPANY as Successor Indenture Trustee and Other Members of an Ad Hoc Unofficial Committee of Noteholders, et al., Appellees. The Renco Group, Inc., Appellant, v. Wilmington Trust Company as Successor Indenture Trustee and Other Members of an Ad Hoc Unofficial Committee of Noteholders, et al., Appellees.
• Court: U.S. District Court — Northern District of Ohio

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338 B.R. 1

WCI STEEL, INC. et al., Appellants, v. WILMINGTON TRUST COMPANY as Successor Indenture Trustee and Other Members of an Ad Hoc Unofficial Committee of Noteholders, et al., Appellees.

The Renco Group, Inc., Appellant, v. Wilmington Trust Company as Successor Indenture Trustee and Other Members of an Ad Hoc Unofficial Committee of Noteholders, et al., Appellees.

No. 4:05 CV 1386.

No. 4:05 CV 1388.

United States District Court, N.D. Ohio, Eastern Division.

September 23, 2005.

Appeal from the Bankruptcy Court, Marilyn Shea-Stonum, J.

COPYRIGHT MATERIAL OMITTED

Christine M. Pierpont, James W. Satola, Squire, Sanders & Dempsey L.L.P., Cleveland, OH, James Thomas, Brooklyn, NY, Adam C. Rogoff, Jonathan Hoff, Michael J. Edelman, Cadwalader, Wickersham & Taft LLP, New York, NY, for Appellants.

Michael A. Gallo, Jr., Nadler, Nadler & Burdman, Youngstown, OH, P. Bradley O'Neill, Thomas H. Moreland, Kramer, Levin, Naftalis & Frankel, Richard M. Seltzer, Cohen, Weiss & Simon, Steven Wilamowsky, Willkie Farr & Gallagher, Andrew Kramer, Jonathan Helfat, Otterbourgh, Steindler, Houston & Rosen, James C. McCarroll, Thomas Moers Mayer, New York, NY, Amy M. Tonti, Gregory L. Taddonio, Paul M. Singer, Reed Smith, Mark E. Freedlander, McGuire Woods, Pittsburgh, PA, David M. Fusco, Schwarzwald & McNair LLP, Maria D. Giannirakis, Office of the U.S. Trustee, U.S. Department of Justice, Michael D. Zaverton, Benesch, Friedlander, Coplan & Aronoff, Cleveland, OH, Israel Goldwitz, Nathaniel Rayle, Sherease Pratt Louis, Pension Benefit Guaranty Corporation, Washington, DC, for Appellees.

MEMORANDUM OPINION AND ORDER

ECONOMUS, District Judge.

The above captioned appeals arise from an order of the United States Bankruptcy Court for the Northern District of Ohio (Shea-Stonum, J.) (the "Bankruptcy Court") denying confirmation of two separate Chapter 11 plans of reorganization: (i) the Debtors' Third Amended Plan of Reorganization (the "Debtors Plan"); and (ii) the Secured Noteholders Plan of Reorganization (the "Noteholders Plan"). In Case number 4:05 CV 1386, Appellant, the Debtors,¹ appeal the Bankruptcy Court's denial of confirmation of the Debtors Plan. In Case number 4:05 CV 1388, Appellant the Renco Group, Inc.² ("Renco"), also appeals the Bankruptcy Court's denial of confirmation of the Debtors Plan. The Appellee in each appeal is the Secured Noteholders.³

This matter is before the Court upon the Secured Noteholders' Motion to Dismiss the Appeals Filed by WCI Steel, Inc. and the Renco Group, Inc. (4:05 CV 1386, Dkt. # 15; 4:05 CV 1388, Dkt. # 15).

I. FACTUAL BACKGROUND⁴

Appellant, WCI Steel, Inc. ("WCI") and certain of its affiliates⁵ (collectively, the "Debtors") operate an independent steel mill in Warren Ohio. Appellant, the Renco Group, Inc. ("Renco") purchased the assets of the Debtors in 1988 for a total purchase price of approximately $66 million. In November 1996, the Debtors issued to Appellee, the Secured Noteholders, a series of notes $300 million face amount due 2004 and secured by substantially all of the Debtors' real property, plant and equipment.

On September 16, 2003 the Debtors filed petitions for relief under Chapter 11 of the Bankruptcy Code. At present, the Debtors continue to operate their business and manage their properties as debtors-in-possession pursuant to §§ 1107 and 1108.⁶

Pursuant to § 1121 the Debtors, after filing under Chapter 11, enjoyed an exclusive period to file a reorganization plan and solicit votes in support thereof. In December 2003 the Bankruptcy Court, over the objection of the Secured Noteholders, granted the Debtors' request to extend this exclusive period through July 14, 2004. On March 26, 2004, the Secured Noteholders filed a motion to terminate the Debtors' exclusive period and represented that they had formulated their own proposed plan of reorganization. The Debtors eventually consented to termination of the exclusive period, and on May 11, 2004, the Bankruptcy Court entered a Stipulated and Agreed Order terminating the exclusive period. That same day, the Secured Noteholders filed a proposed plan of reorganization—the Noteholders Plan. In coordination with the Debtors, the solicitation and confirmation of the two Chapter 11 plans were aligned so that the competing plans moved forward on the same timetable. On June 14, 2004 the Bankruptcy Court approved disclosure statements for each of the competing plans. Thereafter, the identified creditor classes were asked to vote to accept or reject both the Debtors Plan and the Noteholders Plan.

The Debtors Plan is a so-called new value plan. It provides that Renco would receive all of the equity in the reorganized company, in exchange for which Renco would provide the following in consideration: (i) $35 million in cash investment in the reorganized debtors; (ii) a new collective bargaining agreement ("CBA") (reached through extensive negotiations with the USWA); (iii) assumption of existing WCI pension liabilities; and (iv) a promise to make additional contributions of up to $15 million from 2006 to 2014, depending on the future earnings of the new company.

The Noteholders Plan is not a new value plan. It places all of the equity of the reorganized company with the creditors, and WCI's assets would be contributed to a new corporation, the stock of which would be distributed together with other assets to the creditors. The Noteholders Plan, despite extensive negotiations with the USWA and PBGC, contains no CBA, nor does the plan provide for assumption of prepetition liabilities in connection with the Debtors' Pension Plan.

Upon completion of voting, both plans failed to be accepted by each identified class of creditors. The Debtors Plan failed to pass two impaired classes: Class 2, the Secured Noteholders claims, and Class 7, Other Unsecured Claims. The Noteholders Plan also failed to pass all of the identified classes.

Thus, the creditor constituencies failed to approve either plan, and from July through October 2004 the Bankruptcy Court held a series of confirmation hearings regarding the competing plans. During those hearings the Debtors and Renco made, inter alia, arguments to the Bankruptcy Court regarding application of the new value exception (or corollary) to the absolute priority rule and interpretation of the U.S. Supreme Court decision Bank of America National Trust and Savings Association v. 203 North LaSalle Street Partnership, 526 U.S. 434, 119 S.Ct. 1411, 143 L.Ed.2d 607 (1999) (North LaSalle). Because the Debtors' and Renco's Responses to the instant Motion to Dismiss make heavy reference to the new value exception and interpretation of North LaSalle, the Court shall elaborate the details of this legal argument.

The Debtors and Renco argued to the Bankruptcy Court that the Debtors Plan could, pursuant to § 1129(b), be imposed on the dissenting, impaired classes of creditors which included the Secured Noteholders. In making this argument the Debtors and Renco asked the Bankruptcy Court to apply the new value exception (or corollary) to the absolute priority rule. The new value exception is a judicially created exception which permits a junior claim or interest holder—generally, a debtor's equity holders and in this case Renco—to contribute new capital pursuant to a plan and, in return to retain an interest or receive property in the reorganized entity. See In re U.S. Truck Co., 800 F.2d 581, 588 (6th Cir. 1986). The argument in support being that the old equity holder is receiving its interest in the reorganized debtor, not on account of its prior interest, but rather, based upon its new value contribution. See id. Without application of the new value exception, the Debtors Plan would violate the absolute priority rule contained in § 1129(b)(2)(B)(i).⁷

In North LaSalle, the Supreme Court reviewed the requirements for the new value exception to the absolute priority rule and analyzed the confirmation of a debtor's reorganization plan which gave the old equity owners new equity in the reorganized company. Id. at 442-43, 119 S.Ct. 1411. The Court, in doing so, discussed the role of market valuation in evaluating confirmation of a plan of reorganization in accordance with the new value exception. The Debtors and Renco argue that "North LaSalle requires only a market valuation for confirmation of a new value plan and that either a market test or termination of an exclusivity period and the submission of competing plans satisfies such a requirement. As discussed infra, the Bankruptcy Court ultimately disagreed with this argument, and it is the Bankruptcy Court's interpretation and application of North LaSalle (the North LaSalle issue") which, among other issues, the Debtors and Renco emphasize as grounds for their appeals.

On December 15, 2004 the Bankruptcy Court entered an Opinion re: Confirmation of Proposed Competing Plans of Reorganization (the "Confirmation Denial Opinion") pursuant to which it determined that both plans had failed to meet the requirements necessary for confirmation. The Bankruptcy Court noted that its opinion was interlocutory and also mandated that the primary creditor constituencies in the bankruptcy cases seek to reach a consensual resolution. After all parties reported on a deadlock in these negotiations, the Bankruptcy Court issued a Supplement to Opinion re: Confirmation on April 14, 2005 (the "Supplemental Confirmation Denial Opinion") as well as an Order re: Opinion re: Confirmation and Lifting Moratorium with respect to the Filing of Competing Plans of Reorganization" (the "Confirmation Denial Order").

The Confirmation Denial Opinion and the Supplemental Confirmation Denial Opinion set for the following grounds for denying confirmation of the Debtors Plan:

A. The Debtors Plan Violated § 1129(b) because Renco is retaining 100 percent of the Debtors' new equity while failing to contribute new value that is worth the reasonably equivalent value of such equity....