Docket: Case No. 14-10979 (CSS) (Jointly Administered); Related Case Nos.: 14-10992, 14-10990, 14-11039 and 14-11012
Court: United States Bankruptcy Court, D. Delaware; December 19, 2016; Us Bankruptcy; United States Bankruptcy Court
A motion has been filed by Shirley Fenicle and others to dismiss the Chapter 11 bankruptcy petitions of four LSGT Debtors, claiming the filings were made in bad faith due to the discharge of unmanifested asbestos claims in their reorganization plan. This motion is based on events occurring after the original petition date. However, the evidence supports that the LSGT Debtors filed for bankruptcy in good faith, primarily to avoid immediate cash flow insolvency, manage significant potential tax liabilities, and negotiate a resolution that would maximize asset value and recovery on asbestos claims.
The LSGT Debtors faced imminent liquidity issues as their primary assets were inter-company claims against EFH Corp., which was on the brink of bankruptcy. Additionally, they were at risk of a $6.5 billion deconsolidation tax, for which three of the Debtors would be jointly liable. Filing for bankruptcy was seen as essential to directly participate in resolving this tax issue and to protect their asbestos creditors. The subsequent strategy proved effective, culminating in a December 2015 settlement that reinstated inter-company claims and ensured timely filed asbestos claims would be addressed in the current reorganization plan, set for confirmation in February 2017.
The LSGT Debtors filed for bankruptcy in good faith on April 29, 2014, and subsequent developments affirm the correctness of this decision. A motion filed 31 months post-Petition Date is deemed untimely under the doctrine of laches, leading to its denial. The Court has jurisdiction per 28 U.S.C. §§ 157 and 1334, with proper venue established in the District of Delaware. This case is classified as a core proceeding. The Debtors, including LSGT Gas Co. LLC and its affiliates, adopted their current structure following a privatization of TXU Corp. in 2007, and they are successors to entities from a 1996 merger with ENSERCH Corporation, an integrated natural gas company. At the Petition Date, the Debtors' records indicated a $560 million receivable owed to LSGT Gas by EFH Corp. and approximately $990 million in payables owed by LSGT Gas to Sacroc, EECI, and EEC Holdings, primarily composed of intercompany claims and asbestos liabilities. The asbestos claims stem from historic operations of Ebasco Services Incorporated, which operated during an era when asbestos was widely used in the utility sector. An indemnification agreement from a 1993 asset purchase mandates that Enserch and Ebasco cover losses related to their prior operations.
Enserch established an indirect subsidiary, Enserch E&C, Inc. (now EECI), to acquire assets, claims, and liabilities linked to the sale of Ebasco, including indemnity obligations. Claimants have filed proofs of claim against LSGT Debtors and EFH Corp. for asbestos-related liabilities, but the Debtors assert that EECI is primarily responsible for these liabilities from discontinued Ebasco operations, amounting to approximately $12.5 million since 2004. Annual obligations grew significantly in the years leading to the Petition Date, reaching $3.8 million in 2013. A settlement approved by the Court in November 2015 mandates the reinstatement of preserved asbestos claims and intercompany claims in any proposed plan by the Debtors.
Before filing for bankruptcy, LSGT Debtors' officers discussed the potential impact of bankruptcy, including loss of access to funds for asbestos litigation defense, possible tax liabilities from corporate restructuring, the benefits of an automatic stay, and the opportunity to address all claims in bankruptcy court. On April 28, 2014, they formally approved the bankruptcy petitions.
In July 2014, the Debtors sought bar dates for all claims, including unmanifested asbestos claims. The Court ruled that a bar date could be established, leading to a comprehensive noticing plan approved on July 30, 2015, with December 14, 2015, set as the final date for filing asbestos claims.
The proposed reorganization plan reinstates Legacy General Unsecured Claims against the EFH Debtors and intercompany claims among the LSGT Debtors and EFH Corp. The Plan sponsor, NextEra, is a large investment-grade company with a market capitalization of about $60 billion and plans to ensure that Reorganized EFH Corp./EFIH will have no debt above Oncor, its primary asset.
Debtors claim that the financial situation of the LSGT Debtors will improve following the approval of the Plan and Merger Agreement, enabling Reorganized EFH Corp. to cover any potential asbestos liabilities. The Plan stipulates that LSGT Debtors will remain separate entities, fully owned by Reorganized EFH Corp., which is wholly owned by NextEra, Inc. All Legacy General Unsecured Claims, including Asbestos Claims (Class A3), against the LSGT Debtors will be reinstated; however, claims from Asbestos claimants who fail to file by the Asbestos Bar Date will be discharged. This approach aligns with a prior plan confirmed in December 2015, which was later voided for unrelated reasons. Confirmation of the current plan is set for February 2017.
The LSGT Debtors’ Chapter 11 petitions are subject to dismissal under 11 U.S.C. 1112(b) if not filed in good faith, placing the onus on the Debtors to prove good faith through a factual analysis of their intentions and circumstances. Key inquiries involve whether the petition serves a legitimate bankruptcy purpose or is merely a tactic to gain litigation advantage. The Debtors argue that their bankruptcy filing was necessary for several reasons:
1. The only funding for asbestos liabilities was through an intercompany claim against EFH Corp., which was headed for bankruptcy.
2. Without their own bankruptcy, LSGT Debtors would face cash flow insolvency due to ongoing asbestos litigation expenses.
3. The bankruptcy process could provide a structured forum for addressing all claims against the LSGT Debtors, benefiting creditors.
The imminent cash flow insolvency without EFH Corp.'s support strongly supports the LSGT Debtors' claim of a valid bankruptcy purpose. On the Petition Date, their primary assets were unsecured intercompany claims, with no other funding sources to meet asbestos and other liabilities.
The automatic stay resulting from EFH Corp.'s bankruptcy filing prevents the LSGT Debtors from receiving cash payments for unsecured intercompany claims, risking short-term cash flow insolvency without their own bankruptcy filing. If the LSGT Debtors do not file for bankruptcy, they would face ongoing liquidation of asbestos claims and escalating defense costs, leaving them unable to meet creditor obligations. Filing for bankruptcy allows the LSGT Debtors to avoid immediate insolvency, preserve claims against EFH Corp., and engage in negotiations for intercompany claim payments, which are crucial for their long-term solvency.
The Asbestos Movants draw comparisons to the case of 15375 Memorial Corp. v. Bepco, L.P., where the Memorial debtors, both non-operating entities, faced a lack of good faith in their bankruptcy filing. However, the court distinguishes this case from Memorial on several grounds: the LSGT Debtors are part of a broader restructuring involving $42 billion in debt, while the Memorial debtors were not part of an enterprise-wide restructuring and only held insurance policies as assets. Additionally, the Memorial debtors lacked intercompany claims against their parent company, unlike the LSGT Debtors, who have $560 million in viable unsecured claims against EFH Corp. Furthermore, the LSGT Debtors face numerous asbestos claimants and significant post-employment benefit obligations, complicating their financial situation compared to the two-party dispute in Memorial, where one creditor held a substantial majority of the claims. Lastly, the timing of the Memorial petition indicated a litigation strategy rather than a genuine attempt at rehabilitation, contrasting the LSGT Debtors' circumstances.
No evidence indicates that the timing of the LSGT Debtors' bankruptcy filing was influenced by asbestos litigation schedules; rather, it was tied to the enterprise's overall insolvency. The Asbestos Movants argue that the LSGT Debtors had alternative options to bankruptcy, such as seeking court approval to lift the automatic stay on intercompany claims against EFH Corp. However, this would have posed challenges, as immediate payment could conflict with the rights of other unsecured creditors of EFH Corp., who were waiting for a payment plan with uncertain outcomes. The court emphasized that lifting the automatic stay would require meeting stringent conditions, specifically demonstrating a likelihood of success under the “doctrine of necessity,” which applies only when payment to a pre-petition creditor is essential for business operations. The LSGT Debtors, being non-operational units focused on legacy liabilities like asbestos claims, do not provide essential services to EFH Corp., making it improbable that the court would grant such relief.
Additionally, the LSGT Debtors were concerned about potential liability for a substantial deconsolidation tax if separated from EFH/EFIH Debtors and believed their involvement in the bankruptcy plan process could mitigate this risk. The Asbestos Movants countered that EFH Properties, which did not file for bankruptcy, also participated in a tax settlement, suggesting the LSGT Debtors could have similarly avoided liability without filing. However, evidence presented indicated that EFH Properties was in a significantly different situation from the LSGT Debtors.
EFH Properties opted against filing for bankruptcy despite potential deconsolidation tax liabilities due to several critical factors: the risk of a significant tax indemnity claim, the initiation of the Debtors' timeline for accepting or rejecting the master lease of Energy Plaza, and the implications of rejecting the master lease which would require the surrender of the building. In contrast, while EFH Properties maintained positive cash flow, the LSGT Debtors were cash flow insolvent without access to EFH Corp.’s funds. The LSGT Debtors were focused on negotiating a resolution to minimize the impact of deconsolidated tax liabilities while also preserving the potential for a comprehensive plan regarding tax issues. Ultimately, the IRS issued a private letter ruling in June 2016, enabling a tax-free separation of the TCEH Debtors and avoiding approximately $6.5 billion in tax liabilities.
The LSGT Debtors filed for bankruptcy aiming to maximize asset value and recover asbestos-related claims. Although addressing asbestos claims was a consideration, it was secondary to other factors influencing the decision to file. Testimonies indicated that the intent was not to evade asbestos liabilities; rather, discussions about an Asbestos Bar Date arose only after the Petition Date, aimed at making potential buyers more comfortable with existing liabilities. The Debtors' commitment to reinstating timely filed asbestos claims post-filing further supports the assertion that the bankruptcy was not a tactical maneuver to evade such liabilities. There is no evidence suggesting that establishing a bar date was necessary for reinstating intercompany claims against EFH Corp.
Testimony indicates that potential investors expressed concerns regarding the LSGT Debtors’ uncertain asbestos liabilities. In response, the LSGT Debtors sought the Asbestos Bar Date to identify these claims and clarify their liabilities for prospective buyers. Evidence presented at trial demonstrated NextEra's thorough investigation into the asbestos claims and negotiations that led to the inclusion of these claims in its bid, despite the Asbestos Bar Date.
The motion to dismiss is contested on the basis of laches, which, while not explicitly time-restricted in section 1112(b), can be denied for untimeliness. For laches to apply, there must be: (1) a delay in asserting a claim; (2) inexcusable delay; and (3) undue prejudice from the delay. All three factors are present here. The Asbestos Movants waited 31 months into complex cases to file their motion and have been active participants since 2014. Their argument that certain individuals who manifested injuries after the bar date should not be penalized is unsupported by evidence presented at trial, leaving the court without a complete factual basis to justify this delay.
The Asbestos Movants claimed that the Debtors' opposition to appointing a legal representative for future unmanifested claimants caused the delay; however, the U.S. Trustee had previously denied this appointment. Additionally, the request was made 15 months prior and does not account for the subsequent delay.
Regarding undue prejudice, the Asbestos Movants suggest that dismissal would only affect the Asbestos Bar Date for unmanifested claimants. However, the court notes that dismissal could jeopardize the LSGT Debtors, triggering NextEra’s termination rights under the Plan Support Agreement and Merger Agreement, potentially resulting in a $275 million breakup fee and negatively impacting recoveries for EFH Corp.'s unsecured claimants, including a $560 million intercompany claim. It may also undermine a settlement with the EFH Committee, destabilizing the entire EFH Corp. reorganization. The court emphasizes that the current restructuring is delicate, and the Asbestos Movants’ late motion could dismantle the foundation of the reorganization, ultimately harming the asbestos claimants they aim to protect. Thus, the court concludes that undue prejudice exists due to the Asbestos Movants’ 31-month delay in bringing this motion.
The Court views the matter as a collateral attack on the Asbestos Bar Date Order, which is final and non-appealable. Dismissing the case would render the Asbestos Bar Date inapplicable, adversely affecting holders of preserved asbestos claims against the LSGT Debtors, who would receive significantly less if LSGT Gas’s intercompany claims against EFH Corp. are not reinstated. The Court acknowledges the potential harm to asbestos claimants. It concludes that the LSGT Debtors filed their bankruptcy petitions in good faith and for valid purposes, and that the Motion is barred by laches, leading to its denial. The Court issues findings of fact and conclusions of law in accordance with Federal Rules of Bankruptcy Procedure. In October 2014, the U.S. Trustee appointed the EFH Committee to represent the interests of unsecured creditors of Energy Future Holdings Corp. and related entities. Members of the EFH Committee include representatives from various entities, including two Asbestos Movants. Additionally, the Court highlights that prior to the bankruptcy filing, board members attended a presentation on their roles and responsibilities during the restructuring process and held formal meetings to discuss the bankruptcy filing.
Kristopher E. Moldovan's declaration supports Energy Future Holdings Corp and others in opposing the dismissal motion filed by Shirley Fenicia and others concerning the Chapter 11 petitions of several LSGT Debtors, including EECI, Inc. and LSGT Gas Company LLC. Key points include that no real property assets were attributed to the LSGT Debtors, as referenced in multiple documents. A joint board meeting on April 7, 2015, addressed the restructuring process and the establishment of a bar date for asbestos-related claims. The plan details allow the EFH Debtors to either reinstate or cancel interests in certain entities with the consent of the Plan Sponsor, specifically reinstating interests in the LSGT entities. Testimony from Mr. Horton during a 2016 hearing indicated that potential acquirers sought a bar date to achieve certainty regarding asbestos liabilities, emphasizing the need for clarity on these potential claims. The declaration also cites legal precedents regarding the automatic stay and the necessity of good faith in Chapter 11 filings, asserting that reliance on the automatic stay alone does not validate a bad faith filing.
Debtors maintained assets approximately four times greater than their liabilities, filing for bankruptcy primarily to leverage a provision within the Bankruptcy Code that limits damages from lease terminations. The debtor was solvent, supported by a financially stable non-debtor parent company, with cash exceeding liabilities by $45 to $153 million. Courts assess motions to lift the stay through a fact-intensive, case-by-case balancing test, applying a three-prong standard: 1) the potential prejudice to the bankrupt estate or debtor if the stay is lifted; 2) the relative hardship to the non-bankrupt party versus the debtor if the stay is maintained; and 3) the likelihood of the creditor succeeding on the merits of their claim. It was noted that the LSGT Debtors did not need to be in bankruptcy to engage in resolving tax issues, and that discussions around the bankruptcy filing were not aimed at discharging any claims related to asbestos. Conversations regarding claims quantification began around July 2014, following the termination of a Restructuring Support Agreement, as bidders expressed discomfort with the due diligence on asbestos claims.
The document references multiple legal cases and principles related to bankruptcy proceedings and appellate rights. It cites the case of In re Mirant Corp., where the court denied a motion to dismiss based on laches because the board of directors delayed over a year to act on the president's purported lack of authority to file for relief. Additionally, it discusses the necessity for parties to file an appeal if they wish to contest an unfavorable order or judgment, emphasizing that failing to appeal a district court's decision precludes any relief regarding that decision later on. The text also highlights the importance of timely action in legal proceedings and the consequences of inaction, supported by various case law citations including In re Shea Gould, In re I.D. Craig Service Corp., and In re Energy Future Holdings Corp. Finally, it notes the requirement for a party to make an informed decision regarding an appeal, as hindsight does not justify a change in that decision.
