Opinion
Case No. 01-B-16034 (AJG), Adv. Pro. No. 02-3609 A Jointly Administered
April 17, 2003
The issue presented is whether a creditor in asserting the defense of setoff may establish the mutuality of obligations component of such defense by seeking to pierce a debtor's corporate veil or asserting a constructive trust action. The Court finds that where it is established that the underlying cause of action is property of a debtor's estate and only properly assertable by a trustee or debtor-in-possession, a creditor may not avail itself of the benefit of that cause of action unless the creditor obtains standing to commence such cause of action.
On December 12, 2002, Duke Energy Trading and Marketing L.L.C. ("DETM") and Duke Energy Merchants LLC ("DEM" and together with DETM, the "Duke Entities") commenced this adversary proceeding against Enron Corp., Enron North America Corp. ("ENA"), Enron Power Marketing, Inc. Enron Upstream Company, LLC, Enron Reserve Acquisition Corp., Enron Energy Services, Inc., and Enron Liquid Fuels, Inc. (collectively, the "Debtors"). On January 24, 2003, the Duke Entities filed an amended complaint (the "Amended Complaint") against the Debtors seeking declaratory relief.
On January 29, 2003, the Official Committee of Unsecured Creditors (the "Committee") filed a motion, pursuant to F.R.Bankr.P. 7012, seeking dismissal of the Amended Complaint for lack of standing. On February 15, 2003, the Debtors filed a motion to dismiss the Amended Complaint for lack of standing and for failure to state a claim for relief. A hearing on the motions to dismiss was conducted on March 26, 2003.
At the same time, the Committee filed a motion to intervene (the "Intervention Motion") in this adversary proceeding. By Order, dated April 1, 2003, this Court granted the Committee's Intervention Motion.
FACTUAL ALLEGATIONS
Enron Corp. is the ultimate parent corporation of the various other Debtors who were trading subsidiaries. Pre-petition, the Duke Entities entered into various physical and financial trading contracts with the trading-subsidiary Debtors for the purchase and sale of natural gas, electricity, crude oil and other commodities. The transactions involving DETM were carried out pursuant to certain Master Agreements, which governed trading of the commodities in the wholesale markets, and forward contracts executed pursuant to the Master Agreements. Separately, DEM transacted with various of the Debtors with respect to physical commodities and these transactions were separately confirmed and invoiced. The Duke Entities allege that although the various transactions were entered into by DETM and DEM with one or another of the Debtors as a nominal counterparty, the Debtors actually conducted the trading business as a single enterprise without regard to corporate form. The Duke Entities maintain that the trading subsidiaries were undercapitalized shell entities that were managed on an enterprise-wide basis and depended on the commingled resources of the Debtors and the creditworthiness of Enron Corp. It is further alleged that Enron Corp. controlled the finances of the trading subsidiaries. The Duke Entities allege that Enron Corp. structured and operated the commodity trading business and presented it to the public as a single enterprise. The Duke Entities detail the manner in which they allege the trading subsidiaries were operated as alter egos of Enron Corp. and by which the corporate form was disregarded. In addition, it is alleged that the Debtors financial results were reported in a fraudulent manner. It is alleged that Enron Corp. falsely inflated income and revenue by manipulating its corporate structure, looting its trading subsidiaries, mischaracterizing transactions with various special purpose entities, and overstating the value of assets.
The Duke Entities allege that all of the trading transactions they entered into were based on the creditworthiness of Enron Corp., as all credit ratings for the Debtors were reported on a consolidated basis. As such, Enron Corp. guaranteed the transactions entered into between the Duke Entities and the Debtor subsidiaries. The Duke entities allege that they were induced to enter into the transactions based on the false financial statements either supplied by Enron Corp. or which were available publicly.
Pursuant to the terms of the Master Agreements, if the counterparty to an agreement or Enron Corp filed for bankruptcy, DETM had the right to terminate the Master Agreement and the concomitant forward contracts. Commencing on December 2, 2001, Enron Corp. and the other Debtors filed petitions for bankruptcy protection. DETM terminated the various agreements and contracts in December 2001.
In November 2002, the subsidiary Debtors made demand upon DETM and DEM for an accounting of the balances due the Debtors and for payment of the amounts due. The Duke Entities acknowledge that amounts are owed pursuant to the various agreements and contracts entered into with the Debtors but contend that because the Debtors should be considered a single enterprise, the Duke Entities are entitled to setoff from claims of the various Debtors those amounts the Duke Entities owe the Debtors without regard to the nominal party that is counterparty to the particular transaction. The Duke Entities contend that they were forced to commence this adversary proceeding to assert their right to setoff because the Debtors refused to recognize the Duke Entities' claim for setoff and threatened them with lawsuits, attorneys' fees, costs and sanctions if the amounts demanded were not paid immediately.
In the first cause of action of the Amended Complaint, the Duke Entities seek a determination that the alleged conduct on the part of the Debtors justifies piercing the Debtors' respective corporate veils and a declaration that the group of Debtors should be treated as a single entity. In the second cause of action, which is premised on the successful piercing of the Debtors' corporate veils, the Duke Entities seek a declaration that the Duke Entities are authorized to set off from the claims that the various Debtors have against them, the amounts they owe those Debtors, as mutual, without regard to the particular Debtor entity with which they transacted business. In the third cause of action, the Duke Entities seek a declaration that the Debtor entities that have claims against the Duke Entities are holding those claims in constructive trust for the benefit of all the Debtors as a trading enterprise.
In its motion to dismiss the Amended Complaint, the Committee argues that the Duke Entities do not have standing to assert a veil-piercing claim as such claim is property of a debtor's estate and may only be brought by a trustee or debtor-in-possession. The Committee contends that the relief sought by the Duke Entities is a general claim that affects all creditors equally and there is no particularized injury to the Duke Entities that would except it from the proscription from maintaining the action. In addition, the Committee argues that the Debtors have not abandoned the veil-piercing claims. Moreover, the Committee contends that because of the close relation between piercing of a corporate veil and substantive consolidation, the relief sought by the Duke Entities would result in a de facto substantive consolidation of the trading subsidiaries without consideration of the interest of all creditors. The Committee argues that such an outcome would undermine the equitable purpose of both corporate veil piercing and substantive consolidation. The Committee also asserts that a claim seeking to impose a constructive trust for the benefit of a debtor would belong to the debtor who would benefit from such constructive trust and, as such, the Duke Entities have not complied with the prerequisites to controlling such claim.
In their motion to dismiss the Amended Complaint, the Debtors argue that the Duke Entities lack standing to maintain the action because it is a general claim that belongs to the estates and the Duke Entities have not alleged particularized harm. In addition, the Debtors argue that by pursuing claims that are the exclusive property of the Debtors' estates, the Duke entities are violating the automatic stay of 11 U.S.C. § 362. The Debtors contend that, in any event, the Duke Entities' generalized and conclusive allegations are insufficient to support a claim for piercing the corporate veil, setoff, or constructive trust, and that even if veil piercing were available, mutuality for the purposes of setoff would not be present. The Debtors also argue that the Duke entities cannot establish the elements for a constructive trust. Further, the Debtors maintain that the state law claims asserted are pre-empted by the Bankruptcy Code.
The Duke Entities contend that they have a right to have their setoff defense adjudicated as it is a defense to a monetary claim. Further, the Duke Entities maintain that the Second Circuit enforces setoff rights and that the Bankruptcy Code does not affect a creditor's state law entitlement to setoff.
DISCUSSION
The standard for dismissal under Fed.R.Civ.P. 12(b)(6) and 12(b)(1) are substantively identical. Moore v. PaineWebber, Inc., 189 F.3d 165, 169 n. 3 (2d Cir. 1999). All well-pleaded factual allegations in the complaint must be accepted as true and inferences drawn favorably for the plaintiff. See Jaghory v. New York State Dep't of Educ., 131 F.3d 326, 329 (2d Cir. 1997). A complaint may not be dismissed unless it appears, construing the complaint liberally, that the plaintiff can prove no set of facts which entitle it to relief. Id.
However, a party invoking a court's jurisdiction has the burden of proof under a Fed.R.Civ.P. 12(b)(1) motion and a party seeking dismissal has the burden of proof under a Fed.R.Civ.P. 12(b)(6) motion. Lerner v. Fleet Bank, N.A., 318 F.3d 113, 128 (2d Cir. 2003), citing, Thompson v. County of Franklin, 15 F.3d 245, 249 (2d Cir. 1994).
Veil-Piercing Claim
Whether a debtor or a individual creditor own a particular claim is a question of state law. St. Paul Fire and Marine Ins. Co. v. Pepsico, Inc., 884 F.2d 688, 700 (2d Cir. 1989). Where a debtor has a right to assert an alter ego claim to pierce its own corporate veil under applicable state law, that claim is property of the debtor's estate and the claim may only be asserted by the trustee or debtor-in-possession. Kalb v. Voorhis Co. v. American Financial Corp., 8 F.3d 130, 132 (2d Cir. 1993). The choice of law principles of the forum determines the law that applies and, in this context, under the interest analysis applied by New York law, the law of the state of Delaware applies to determine whether the Debtors have the right to assert a claim to pierce their own corporate veils. Kalb, 8 F.3d at 132.
The trading-subsidiary Debtors, whose corporate veils the Duke Entities seek to pierce, are Delaware corporations or, in one instance, a Delaware limited liability company.
Based on the fact that Delaware law allows a subsidiary to maintain an action against a corporate parent, courts have found that a Delaware court would permit a debtor corporation to assert a claim to pierce its own corporate veil. Murray v. Miner, 876 F. Supp. 512, 517 (S.D.N.Y. 1995); Pereira v. Cogan, 2001 WL 243537 19-20 (S.D.N.Y. 1995). Thus, the trustee or debtor-in-possession would have exclusive standing to maintain a Delaware corporation's alter ego claim of a general nature.
Where a claim is generalized, with no particularized injury stemming from it and where the claim may be brought by any creditor, the trustee or debtor-in-possession is the appropriate party to assert the claim and creditors are subject to the outcome of the action brought by the trustee or debtor-in-possession. St. Paul, 884 F.2d at 701. There is no distinction, in this regard, with respect to claims asserted against the debtor and claims asserted against third-parties. Id. at 701. Thus, this principle applies to a claim brought to pierce the corporate veil of a debtor in its own bankruptcy case.
What must be considered is whether the injury alleged is peculiar and personal to the claimant or is general and common to the corporation and creditors. Koch Refining v. Farmers Union Central Exchange, Inc., 831 F.2d 1339, 1349 (7th Cir. 1987). Where the harm suffered by the claimant is no different than the harm suffered by other creditors, the action belongs to the trustee or debtor-in-possession. St. Paul Fire, 884 F.2d at 704. The trustee or debtor-in-possession is given exclusive right to assert alter ego claims to ensure fair and equitable treatment of all similarly situated creditors. S.I. Acquisition, Inc. v. Eastway Delivery Services, Inc. (In re S.I. Acquisition, Inc.), 817 F.2d 1142, 1153 (5th Cir. 1987). This is because if alter ego allegations are proven, more assets are available to that debtor to meet creditor claims, S.I. Acquisition, Inc., 817 F.2d at 1153. Allowing the trustee or debtor-in-possession to pursue the claim avoids the prospect of creditors seeking to gain advantage over other creditors by pursuing the alter ego claims on a first-come, first-serve basis. St. Paul Fire, 884 F.2d at 700-01. Those creditors asserting them first would be preferred to others. Where claims are property of a debtor's estate, an individual creditor may not assert it until the trustee abandons the claim. St. Paul Fire, 884 F.2d at 701; Miner, 876 F. Supp. at 517.
The Duke Entities seek to pierce the corporate veils of the Debtors because the Duke Entities maintain that by treating the Debtors as a single enterprise, they will attain the mutuality — between the debts they owe the Debtors and those owed to them by the Debtors — required to sustain the defense of setoff.
Section 553 of the Bankruptcy Code permits the setoff of mutual debts that arose before the commencement of the case. In re Bennett Funding Group, Inc., 146 F.3d 136, 138-39 (2d Cir. 1998). The section preserves whatever rights of setoff a party has under applicable non-bankruptcy law. Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 18, 116 S.Ct. 286, 289, 133 L.Ed.2d 258 (1995). A setoff concerns a defendant reducing a plaintiff's claim against it by its claim against the plaintiff which arises out of a different transaction than the one upon which the plaintiff basis its claim. Holford v. Powers (In re Holford), 896 F.2d 176, 178 (5th Cir. 1990). The debts are considered mutual when the debtor and creditor each incurred its debt to the other in the same right or capacity. Bennett Funding, 146 F.3d at 139.
As previously noted, the trustee or debtor-in-possession is the proper party to assert a claim if the claim is general, with no particularized injury, and may be brought by any creditor. The Duke Entities contend that not "any creditor" can assert a setoff defense, therefore they maintain that they have a particularized injury. The Duke Entities maintain that the harm they sustained is the injury for the alleged looting of the Debtors with which they "nominally" transacted business. Thus, the Duke Entities seek to collapse the enterprise, arguing that then their claims against the enterprise will be considered mutual to the debts owed to them by the collapsed enterprise and they may avail themselves of setoff.
The Debtors and the Committee maintain that the Duke Entities may not assert the underlying claim based on piercing the corporate veils of the various Debtors because that claim is property of the respective Debtors' estates and the Duke Entities have not asserted particularized harm. The Committee further argues that allowing individual creditors to assert these claims will result in piecemeal resolution of generalized claims. Further, the Debtors contend that even if the various Debtor entities are collapsed into a single enterprise, the requisite mutuality for the purposes of 11 U.S.C. § 553 setoff will not have been met.
The conduct described in the Amended Complaint by which various Debtors were allegedly looted and controlled by other of the Debtors and which allegedly caused the Duke Entities to suffer injury is the same conduct that allegedly injured all of the other creditors of the various Debtors to whom obligations were not met. The conduct set forth in the Amended Complaint was not directed at the Duke Enterprises specifically. Rather, if proven, the conduct equally harmed all creditors of the respective allegedly looted estates. See Kalb, 8 F.3d at 133. These allegations have been made by other creditors of these estates. Indeed, the parties concede that the allegations have been included in various governmental or examiner reports. The conduct alleged relates to the overall operations of the Debtor entities and impacted each Debtors' creditors generally. All creditors of a particular looted Debtor would benefit from the successful prosecution of an action to pierce the corporate veil of that Debtor to reach assets held by other Debtors.
The conduct described includes allegations of (i) the Debtors presenting themselves as a single enterprise, (ii) the manner in which the Debtors transacted business, and (iii) the entangled elements of the inter-company affairs.
That the interrelationship of the Debtor entities is not unique to its dealings with the Duke Entities is evidenced by the various guaranties and multiple claims against certain Debtors held by many of the creditors and by the way the funds were swept daily to Enron Corp. and then redistributed to various entities. See In re Enron Corp., 279 B.R. 671, 689 (Bankr.S.D.N.Y. 2002). Indeed, similar to the Duke Entities, many, if not most, of the other trading creditors obtained guaranties from Enron Corp. Id. at 689 n. 26.
The reference to the examiner report is to the Second Interim Report of the Enron Corp. examiner appointed by this Court on May 24, 2002 to investigate various aspects of these cases.
The harm suffered by the Duke Entities as a result of the alleged treatment of certain Debtors as the alter ego of other debtors was not different from the harm sustained by any of the other creditors of the allegedly looted estates who might seek to maintain alter ego claims. See St. Paul, 884 F.2d at 704. The Duke Entities are similarly situated to all of the other creditors who could allege they were treated inequitably by the alleged looting of certain Debtors with the result that those Debtors could not meet their obligations to them, and the creditors of each of these estates would share a common injury.
The Duke Entities seek to distinguish their harm from that of other creditors by asserting that their right to setoff is a particularized harm distinct from that of other creditors. The initial generalized allegations are that certain Debtors' actions harmed other Debtors' estates which, in turn, led to the Duke Entities' injury because the allegedly "looted" Debtor entities could not pay the Duke Entities amounts owed them. As a consequence, the Duke Entities cannot collect from the allegedly looted Debtor entities yet they still owe amounts to other Debtor entities. Thus, the Duke Entities do not seek to pierce the corporate veil of the looted Debtor entities to bring amounts into those looted estates for equitable distribution to the creditors of those estates. Instead, the Duke Entities seek to pierce the corporate veil to assert their setoff defense.
However, the Duke Entities may not assert that harm to distinguish themselves from other creditors because that harm does not stem from their role as a creditor of any of the allegedly looted Debtors' estates. Rather, that harm is based on the Duke Entities role as a debtor of various of the other Debtors' estates. The Duke Entities owe amounts to certain Debtors who are not indebted to them in return. Therefore, the Duke Entities seek to treat all the Debtors as a single enterprise to attempt to setoff the amounts the Duke Entities owe certain Debtors against the amounts the allegedly looted Debtors owe them. Allowing a creditor to assert a veil-piercing claim against a group of entities where the conduct at issue is general to all creditors of those entities, solely based upon the happenstance that the creditor owes a debt to one of the entities in the group, would enable such creditor to effectively control a claim that belongs to each of the estates without a corresponding fiduciary obligation to represent the interests of each of those estates. Thus, an action that is property of a particular estate which should be pursued for the benefit of that estate's creditors, might be brought by an entity with interests contrary to the interests of the estate's creditors. Indeed, in these cases, many ENA creditors have argued from the outset that the ENA entities should be treated separate and apart from Enron Corp., even though many of these creditors also have guarantees from Enron Corp. and dealt with many of the alleged looted subsidiaries. Therefore, the position taken by various creditors with whom the Debtors transacted business similarly appears to depend on how each would be impacted by the treatment of the Debtors as a single enterprise or separate entities. This further supports the conclusion that an action to pierce a corporate veil under these circumstances belongs to each estate.
Moreover, the conduct that allegedly caused this injury was the alleged actions by the Debtors in presenting themselves as a single enterprise. Thus, the injury did not stem from conduct directed specifically at the Duke Entities but, as previously discussed, would have impacted all parties that transacted business with the Debtors based on the Debtors' method of operations and consolidated business financial records.
The cause of action seeking to pierce the corporate veils of the respective Debtors is a claim alleging general injury to all of the creditors of the respective Debtors' estates and each claim belongs to the estates of the respective corporate Debtors. As such, the proper party to assert such claims is each respective debtor-in-possession. That the Duke Entities seek to use a successful prosecution of a veil-piercing claim for the purpose of a defense of setoff does not impact their standing to assert the underlying corporate veil piercing claim when the allegations concerning the veil piercing impacts all creditors of the respective Debtor's estate generally. The first cause of action is dismissed because the Duke Entities do not have standing to assert it.
The third cause of action seeks to impose a constructive trust on claims held by certain Debtor entities against the Duke Entities for the benefit of the Debtors as a trading enterprise. The Committee contends that through the assertion of this claim, the Duke Entities have appointed themselves the representative of the Debtors' estates seeking to impose constructive trusts in certain interests held by the various Debtors for the benefit of the putative collective enterprise. The Committee argues that the Duke Entities do not have standing to assert claims to transfer property rights from one debtor entity to another debtor or group of debtors. The Debtors argue that the elements of a constructive trust are not established by the allegations of the Amended Complaint.
The Court agrees that any claim to assert a constructive trust for the benefit of a debtor belongs to the purported beneficiary debtor. A party seeking to control an action or rights belonging to a debtor must seek court authorization to obtain standing to take control of an action that is owned by a debtor's estate. See Unsecured Creditors Committee v. Noyes (In re STN Enterprises), 779 F.2d 901, 904-05 (2d Cir. 1985); Commodore Int'l Ltd. v. Gould (In re Commodore Int'l Ltd.), 262 F.3d 96, 100 (2d Cir. 2001); Glinka v. Murad, (In re Housecraft Industries USA, Inc.), 310 F.3d 64, 70-72 (2d Cir. 2002). Thus, the third cause of action is dismissed because the Duke Entities do not have standing to assert it.
With respect to the Duke Entities second cause of action where they seek to assert a defense of setoff, inasmuch as the underlying premise of the claim requires a piercing of the corporate veils of the various estates or the establishment of the constructive trust claim for the benefit of the collective Debtors, the Duke Entities may not maintain such defense until either the Debtors abandon the claims asserted in the first and third causes of action of the Amended Complaint or the Duke Entities obtain standing to assert such claims by pursuing the prerequisites necessary to attain standing to take control of an action that is owned by a debtor's estate. See STN, 779 F.2d at 904-05; Commodore, 262 F.3d at 100; Housecraft, 310 F.3d at 70-72. The ability to maintain the setoff defense is dependent on the viability of the veil-piercing and constructive trust claims. As the Court has found that the Duke Entities do not have standing to assert those claims, the second cause of action asserted in the Amended Complaint seeking setoff is dismissed.
In view of the dismissal of the setoff claim because the Duke Entities do not have standing to assert the veil-piercing or constructive trust claims, the Court does not reach the issue of whether treating separate counterparties to certain transactions as one enterprise would be sufficient to render debts between the various parties as "mutual" for purposes of 11 U.S.C. § 553 setoff.
The Duke Entities also argue that the debtor-in-possession of the respective estates cannot effectively represent the Duke Entities as creditors because the debtors-in-possession are opposed to the Duke Entities in this adversary proceeding and therefore have conflicting interests to those of the Duke Entities. However, the duty of the trustee or debtor-in-possession is to gather estate assets for pro rata distribution to all creditors. See Koch, 8 F.3d at 1352. As such it has a fiduciary duty to all creditors and must seek to protect the interests of all creditors collectively. Id. at 1352. The fiduciary duty is to the class of creditors, not individual creditors and the trustee or debtor-in-possession is the appropriate party to control any corporate veil-piercing claim owned by a debtor.
Finally, the Committee argues that the relief Duke seeks will result in de facto or selective substantive consolidation which may prove detrimental to many of the Debtors' other creditors. The Committee maintains that such a result would be contrary to the concept that substantive consolidation may be imposed only to benefit all creditors. The Committee further argues that allowing this action to proceed for the benefit of one or two creditors will result in similar suits being filed by others seeking to benefit individual creditors and, indeed, similar suits have already been filed. While acknowledging that substantive consolidation and veil piercing are separate actions, the Committee contends that Duke's allegations could be used to establish both the criteria for veil piercing and substantive consolidation and is more properly addressed in the context of considering the claims of all creditors. Moreover, the Committee argues that the veil piercing action will imperil the chapter 11 plan negotiations. The Committee notes that it and the Debtors have already conducted extensive investigation into the basis for consolidation of several of the Debtors' estates. Further, all of the relevant constituencies have been involved in chapter 11 plan negotiations which may culminate in resolution of all substantive consolidation issues through a consensual plan. The Committee maintains that the various constituencies are endeavoring to avoid litigation of various inter-estate disputes with the goal of compromising global issues in a manner that will efficiently maximize the assets of these estates. The Committee further observes that all parties would have an opportunity to be heard on plan issues at a confirmation hearing. The Committee maintains that individual efforts like those of the Duke Entities should not be permitted to jeopardize these efforts.
The Duke Entities argue that substantive consolidation and corporate veil piercing are separate causes of action that occur during separate periods of the bankruptcy process. The Duke Entities further argue that their veil-piercing claim will only impact the amount of money available for any plan and the Committee's substantive consolidation concerns will address the distribution of those amounts.
As the Court has found that the Duke Entities do not have standing to assert the veil-piercing cause of action, it need not address the issue of whether a consequence of pursuit of that cause of action would be de facto substantive consolidation.
CONCLUSION
Inasmuch as the first cause of action seeking to pierce the corporate veils of various Debtors is a general claim that similarly affects all of the creditors of the respective Debtors' estates, that cause of action is property of the respective Debtors' estates and may only be brought by a trustee or the debtor-in-possession. The Duke Entities do not have standing to maintain that cause of action. Therefore, the first cause of action is dismissed.
The third cause of action which seeks to impose a constructive trust is property of the estates of those Debtors for whose benefit the constructive trust is sought, as such, the Duke Entities do not have standing to assert the third cause of action.
As pursuit of the second cause of action depends on the viability of the first or third cause of action and as those causes of action have been dismissed, the second cause of action is also dismissed. Therefore, the Amended Complaint is properly dismissed.
Counsel for the Debtors is to settle an order consistent with this Memorandum Decision.