Opinion
No. 04 Civ. 5499 (HB).
November 1, 2004
OPINION ORDER
Appellant, Pension Benefit Guaranty Corporation ("PBGC"), appeals from the May 21, 2004 Order of the Honorable Arthur J. Gonzalez, Regarding Motion of Pension Benefit Guaranty Corporation for Ballot Correction or Temporary Allowance for Voting Purposes. For the following reasons, Bankruptcy Judge Gonzalez's Order Regarding PBGC's Motion for Ballot Correction or Temporary Allowance for Voting Purposes is AFFIRMED.
I. BACKGROUND
PBGC is a federal agency that administers the pension plan termination insurance program created by Title IV of the Employee Retirement Income Security Act of 1974 ("ERISA"). 29 U.S.C. §§ 1301- 1461 (2000 Supp. I 2001). Inter alia, PBGC was established by Congress "to encourage the continuation and maintenance of voluntary private pension plans for the benefit of their participants." 29 USCS § 1302(a)(1). PBGC is a substantial creditor in In re Enron and maintains significant claims against Enron Corporation and the Debtor subsidiaries. In re Enron Corp., No. 01-16034 (AJG) (S.D.N.Y.) (hereinafter "In re Enron").
A. In Re Enron
Beginning in December 2001, Enron Corporation ("Enron") and 179 of its subsidiaries ("Debtor Subsidiaries") (collectively, "Debtors") filed for Chapter 11 bankruptcy protection. In re Enron, No. 01-16034 (Bankr. S.D.N.Y. Dec. 2, 2001). Debtors filed with the Bankruptcy Court a proposed Chapter 11 reorganization plan and related disclosure statements on July 11, 2003. In re Enron, No. 01-16034 (Bankr. S.D.N.Y. Jul. 11, 2001)
On October 10, 2002, pursuant to stipulation and order, PBGC's 15 proofs of claim were timely filed in each of the 180 Debtors' Chapter 11 reorganizations. (PBGC Record, Ex. 1, at 2) ("Claim Stipulation"). The purpose of the Claim Stipulation was to relieve the Bankruptcy Court, Debtors, the claims agent and PBGC from the significant administrative burden of multiple claims, which could have run into the thousands, and to permit the consolidation of PBGC's proofs of claim. (PBGC Record, Ex. 1 at 2-3). The PBGC claims asserted joint and several liability for any unfounded benefit obligation under the five defined benefit pension plans operated by Enron if PBGC were to force an "involuntary" termination of the plans pursuant to 29 U.S.C. § 1342. B. In re Enron Chapter 11 Reorganization Plan Voting Procedures
"[I]n any case in which a single-employer plan is terminated in a distress termination under section 1341(c) of this title or a termination otherwise instituted by the corporation under section 1342 of this title, any person who is, on the termination date, a contributing sponsor of the plan or a member of such a contributing sponsor's controlled group shall incur liability under this section. The liability under this section of all such persons shall be joint and several." 29 U.S.C. § 1362 [emphasis added].
On August 28, 2003, Debtors filed a motion to establish voting procedures in connection with the reorganization plan process and the temporary allowance of claims. ("Plan Proposal Motion") (PBGC Record, Ex. 3). In response, on September 23, 2003, PBGC filed objections to the proposed voting procedures, arguing that Debtors' voting procedures failed to ensure correct docketing of claims or provide creditors with the capacity to correct errors in the docketing of claims. ("PBGC Objections") (PBGC Record, Ex. 5). After negotiating for the ability to provide creditors with the ability to move for ballot corrections, PBGC withdrew its objection.
On January 9, 2004, the Bankruptcy Court approved the Plan Voting Order. ("Voting Procedures Order") (PBGC Record, Ex. 7). The Voting Procedures Order allowed for, among other things, temporary allowance of claims and reorganization plan voting procedures. The relevant provision of the Voting Procedures Order is Paragraph 3(i), which states:
[U]nless otherwise temporarily allowed for voting purposes in accordance with the procedures set forth in this Order, if one proof of claim asserts the same claim against multiple Debtors, then such claim shall be allowed for voting purposes only against the Debtor as docketed in BSI's [Bankruptcy Services, LLC, herein "BSI"] claims database as of January 6, 2004;
(PBGC Record, Ex. 7 at 3). Paragraph 3(j) of the Voting Procedures Order, a catchall provision, further supplemented Paragraph 3(i), stating:
Unless otherwise provided in this Order or other orders of the Bankruptcy Court, the allowed amount of claim for voting purposes shall be the amount as docketed in BSI's claims database as of January 6, 2004.
(PBGC Record, Ex. 7 at 3-4). Accordingly, creditors were to be provided ballots to vote for or against the Chapter 11 reorganization plan and the votes were in proportion to their claims as docketed in BSI's database as of January 6, 2004.
In total, the BSI database authorized PBGC 15 proofs of claim totaling $305.5 million and exclusively against Enron. The ballots failed to provide PBGC with the right to vote on the Debtor Subsidiaries' Chapter 11 reorganization plan. (PBGC Record, Ex. 7). After contacting BSI and Debtors to determine the cause of the discrepancy, and after failure to settle the matter affably, on February 17, 2004 PBGC filed a motion for ballot correction or temporary allowance for voting purposes. ("Ballot Correction Motion") (PBGC Record, Ex. 13). In response to the Ballot Correction Motion, Debtors and Creditors Committee both filed objections. ("Ballot Correction Objections") (PBGC Record, Ex. 14 and 15).
PBGC's asserted claims have been estimated by PBGC between $305.5 million to $424 million. For voting purposes, PBGC's claims were estimated at $321.8 million. At the July 22, 2004 Status Conference before Judge Gonzalez, PBGC acknowledged that its claims were no greater than $321.8 million. The transcript of the Status Conference was "so ordered" by Judge Gonzalez. (Appellees Op. Br. at 7 n. 5 (filed Aug. 13, 2004)).
Enron Corp., and its affiliated debtor entities, as debtors and debtors in possession filed objections on Apr. 29, 2004.
Official Committee of Unsecured Creditors of Enron Corp.,et al., filed objections on May 4, 2004.
At the May 6, 2004 oral argument, PBGC requested the Bankruptcy Court to direct Debtors and their agents to rectify any inconsistencies in the claims database so as to accurately reflect PBGC's approximately 2700 claims (15 proofs of claim × 180 debtors = 2700 claims). ("Ballot Correction Hearing") (PBGC Record, Ex. 17). Specifically, PBGC argued that the 15 separate proofs of claim apply against both Enron and Debtor Subsidiaries in accordance with joint and several liability.
Judge Gonzalez reviewed PBGC's Ballot Correction Motion, and rejected PBGC's Ballot Correction Motion as part of his May 13, 2004 Decision ("Decision Hearing"). During the Decision Hearing, Judge Gonzalez stated that "the Voting Procedures Order specifically provides how all claims, including the PBGC's claims, will be treated for voting purposes." (PBGC Record, Ex. 18 at 19:4 — 17) (emphasis added). Judge Gonzalez determined that the Voting Procedure Order was designed "to ensure that a creditor's vote was not duplicated in an amount that did not reflect that creditor's true economic stake in the case," and to "operat[e] as an objection to these other duplicate claims for voting purposes. . . ." (PBGC Record, Ex. 18 at 19:17 — 20:2) (emphasis added). Relying on Paragraph 3(i) of the Voting Procedures Order, Judge Gonzalez limited PBGC's claim for voting purposes to those only against Enron, because "the PBGC's claims assert one set of claims against Enron Corp. that are then asserted against multiple debtors." ( Id. at 21:13 — 22:3). Pursuant to the Decision Hearing, PBGC was limited to vote 15 claims, one for each distinct proof of claim, and only against Enron. Judge Gonzalez noted that "the burden of proof in that context was not established by PBGC to allow the votes in the other debtors." (PBGC Record, Ex. 18 at 24:21-25:4).
Following the Decision Hearing, Judge Gonzalez issued an Order Regarding PBGC's Motion for Ballot Correction or Temporary Allowance for Voting Purposes (the "Ballot Order") on May 21, 2004, clarifying the Decision Hearing. (PBGC Record, Ex. 19). The Order reinforced Judge Gonzalez's ruling during the Decision Hearing and consolidated PBGC's claim for voting purposes. (PBGC Record, Ex. 19 at 2). PBGC filed its appeal on May 28, 2004.
The Enron reorganization plan was confirmed on July 15, 2004. 7/16/04 Wall St. J. A2.
II. DISCUSSION
A. Standard of ReviewA district court reviews the Bankruptcy Court's findings of fact under the "clearly erroneous" standard, see Fed.R.Bankr.P. 8013, while its conclusions of law are reviewed under the de novo standard. See In re AroChem Corp., 176 F.3d 610, 620 (2d Cir. 1999) (holding that "we review the bankruptcy court decision independently, accepting its factual findings unless clearly erroneous but reviewing its conclusions of law de novo.") (citation omitted).
B. Appellant Objections to the Ballot Order
PBGC appeals the Ballot Order on three grounds. First, PBGC contends that the Bankruptcy Court's interpretation of its own order was procedurally flawed because PBGC was not provided adequate opportunity to object to the Voting Procedures Order. Second, PBGC maintains that courts recognize joint and several liability, and by limiting PBGC to voting only on the Enron reorganization, the Bankruptcy Court inequitably limited PBGC's claims. Third, PBGC argues that the Ballot Order artificially deflated PBGC's voting presence in contravention of the Bankruptcy Code which, it claims, authorizes the holder of a permissible joint and several claim the right to vote on each debtor's proposed plan.
1. Appellant's Procedural Objection
As part of the Voting Procedures Order, Creditors were provided with clear procedures for objecting to the treatment of claims for voting purposes and correction procedures. (PBGC Record, Ex. 7 at 2-7). Debtors explained the purpose of the Voting Procedures Order in the Plan Proposal Motion:
[T]o clearly set forth how creditors will be entitled to vote their claims, ensure that creditors are afforded an opportunity to address any disagreement with the classification and treatment of their claim for voting purposes, reduce the burdens on the Debtors' estates and streamline the reconciliation process, the Debtors request authority to implement a process for addressing the temporary allowance of continent, unliquidated and disputed claims for voting purposes.
(PBGC Record, Ex. 3 at 2). The Voting Procedures Order was issued, without objection from PBGC, in an attempt to create a single voting procedure, while fairly addressing the reconciliation of 23,000 proofs of claims — including 4,000 to 6,000 claims filed or scheduled as contingent and/or unliquidated. (PBGC Record, Ex. 3 at 2).
The Voting Procedure Order set forth sufficient and adequate procedural grounds to seek temporary allowance of a claim for voting purposes, including procedures for objections with respect to any claim based on the claim's amount, classification, or validity. PBGC withdrew its motion to permit creditors that disagreed with the voting treatment to challenge the procedures before they were enacted. PBGC cannot revisit its tactical decision now. PBGC could have taken an appeal and stayed the tabulation of the vote, or it could have moved for a stay of the Confirmation Hearing. Alternatively, PBGC could have appealed the Voting Procedures Order. The Bankruptcy Court, failing an appeal from any party, concluded that the ballots should be issued as ordered with certain corrections, as provided under Paragraph 3(i).
Pursuant to Section 105(a) of the Bankruptcy Code, the Bankruptcy Court acted well within its power to craft and interpret the Voting Procedure Order and ensure that PBGC would be limited to voting its full economic stake and no more. As part of the Voting Procedures Order, parties were provided with an agenda for objecting to the treatment of claims for voting purposes and ballot correction procedures. (PBGC Record, Ex. 7 at 2-7). While PBGC filed an objection to the Plan Proposal Motion, its objection was withdrawn. (PBGC Record, Ex. 17 at 226:11 — 14). Absent any objection by PBGC to the Plan Proposal Motion, it was implemented in a reasonable manner.
PBGC's motion was filed as a protective measure for the temporary allowance of its joint and several claims in full against each of the 180 debtors. (PBGC Record, Ex. 13 at 2).
Accordingly, PBGC's procedural objection is denied.
2. Joint and Several Liability
PBGC objects to the Bankruptcy Court's decision to interpret the Voting Procedures Order to limit PBGC to voting 15 proofs of claim, and limit those votes to Enron's reorganization plan.
PBGC has no predicate for asserting joint and several liability for voting purposes against each of the 180 Debtors Chapter 11 reorganizations because PBGC's joint and several liability is not ripe yet. Specifically, PBGC must take affirmative steps towards liquidating the Defined Benefit Plans before PBGC may assert a claim for joint and several liability. Pursuant to 29 U.S.C. § 1342(a), "PBGC may initiate involuntary termination proceedings whenever a plan fails to meet specified funding requirements." Jones Laughlin Hourly Pension Plan v. LTV Corp. 824 F.2d 197, 199 (2d. Cir. 1987). To satisfy the statutory mandate and terminate a pension plan, PBGC must find:
PBGC claims represent potential liability under five defined benefit pension plans ("Defined Benefit Plans") operated by Enron and certain Debtor Subsidiaries: (1) the Enron Corporation Cash Balance Plan; (2) the Enron Financial Services Pension Plan; (3) the San Juan Gas Company Pension Plan; (4) the Garden State Paper Pension Plan; and, (5) the Portland General Electric Company Pension Plan. (PBGC Record, Ex. 2).
(1) The plan has not met the minimum funding standard required under Section 412 of Title 26, or has been notified by the Secretary of the Treasury that a notice of deficiency under section 6212 of Title 26 has been mailed with respect to the tax imposed under section 4971(a) of Title 26;
(2) The plan will be unable to pay benefits when due;
(3) The reportable event described in section 1343(c)(7) of this title has occurred; or,
(4) The possible long-run loss of the corporation with respect to the plan may reasonably be expected to increase unreasonably if the plan is not terminated.29 U.S.C. § 1342(a). PBGC's claims for unfounded benefit liabilities are contingent upon satisfaction of one of these statutory prerequisites in order to terminate the Defined Benefit Plans. At the time of this appeal, PBGC had failed to satisfy the requirements articulated by 29 U.S.C. § 1342(a). As provided by 29 U.S.C. § 1362, it is only after PBGC terminates the Defined Benefit Plans that joint and several liability for the PBGC claims arises among the Debtor Subsidiaries. See supra at footnote 1.
At the time the objection was filed, Debtors (a) "were current on all of the minimum funding contributions to their [Defined Benefit Plans]," . . . "there had been no indication by any authority that the [Defined Benefit Plans] may be unable to pay benefits when due as would be required in (b) above. The `reportable event' referred to in 29 U.S.C. § 1342(a)(3) is related to distributions from a covered plan to a `substantial owner' of the plan sponsor, which is inapplicable in the context of the Debtors' case "and had not yet commenced "termination proceedings based upon (d) above." (PBGC Record, Ex. 14 at 12 — 13). After the instant appeal was filed, PBGC commenced an action in the United States District Court for the Southern District of Texas to terminate: (1) the Cash Balance Plan, (2) the Garden State Plan, (3) the San Juan Gas Company Pension Plan, and (4) the EFS Pension Plan. Pension Benefit Guarantee Corporation v. Enron Corp., et al 04 Civ. 02151 (S.D.T.X Jun. 3, 2004) (Harmon, J.).
Accordingly, at the Decision Hearing, the Bankruptcy Court interpreted Paragraph 3(i) to mean that "if one proof of claim asserts the same claim against multiple debtors," for example, against Enron and Enron's debtor subsidiaries, "then such [a] claim shall be allowed for voting purposes only against the debtor as docketed in BSI's claim database." (PBGC Record, Ex. 18 at 19:12 — 17). Interpreting Paragraph 3(i), the Bankruptcy Court did not permit PBGC to vote the same claim against both Enron and Debtor subsidiaries. Absent termination of the Defined Benefit Plans, the Bankruptcy Court correctly denied PBGC's efforts to assert joint and several liability where no such liability had yet been triggered.
Judge Gonzalez rejected PBGC's alternative Paragraph 3(i) interpretation because PBGC had acquiesced to the current voting procedures when it withdrew its objections to the Voting Procedures Order. ( See PBGC Record, Ex. 18 at 20:19 — 21:12).
3. Voter Disenfranchisement Voting Inflation.
PBGC argues that the dilution of PBGC's voting claims from 2700 total claims to 15 was in contravention of Sections 502(a) and 1126(a) of the Bankruptcy Code, because the holder of allowed claims has the statutory right to vote to accept or reject a reorganization plan.
The temporary allowance of a claim for voting purposes is committed to the sound discretion of the bankruptcy court pursuant to Federal Rule of Bankruptcy Procedure § 3018(a), which grants a court the authority to "temporarily allow the claim or interest in an amount which the court deems proper for the purpose of accepting or rejecting a plan." Fed.R.Bankr.P. 3018(a). See also In re Zolner, 173 B.R. 629, 633 (Bankr. N.D. Ill. 1994). The rule "specifically and elastically provides that a court may, for the purposes of voting, temporarily allow a claim or interest in an amount which the court deems proper." Matter of Johns-Manville Corp., 68 B.R. 618, 631 (Bankr. S.D.N.Y. 1986) (emphasis added). However, both the Bankruptcy Code and Federal Rules of Bankruptcy Procedure are noticeably silent as to how a Bankruptcy Court should calculate such a claim. See, e.g., In re Ralph Lauren Womenswear, Inc., 197 B.R. 771, 775 (Bankr. S.D.N.Y. 1996). The temporary allowance of a claim for voting purposes is left to the discretion of the court to reasonably "employ whatever method is best suited to the circumstances of the case." In re Ralph Lauren, 197 B.R. at 775.
"We are not . . . dealing with an estimation issue under 11 U.S.C. § 502(c), which appears to confine itself to `contingent or unliquidated' claims for distribution purposes." In re Stone Hedge Properties, 191 B.R. 59, 63 (Bankr. M.D. Pa. 1995).
When circumstances warrant the estimation of claims for voting purposes, the bankruptcy court has utilized its claim estimation authority to ensure voting power was commensurate with economic interest. For example, in Matter of Johns-Manville Corp., a group of asbestos health victims objected to the legal adequacy of the voting procedures adopted by the bankruptcy court. 68 B.R. 618 (Bankr. S.D.N.Y. 1986). The asbestos victims objected to the bankruptcy court's decision to affix a value of $1 to each asbestos victim's claim, instead of the estimated value of $26,000. Id. at 631. Relying on Fed.R.Bankr.P. 3018(a) for the authority, the bankruptcy court denied the objections because the objections disregarded the realities and inequities of granting PBGC a disproportionate voting share. Id. at 631 (holding that "the construct of the voting procedure [was] proper as it clearly [met] the desideratum of expanded suffrage and participation in the reorganization by all parties in interest.").
While not binding on this Court, the estimation of claims for voting purposes was also utilized In re Hydrox Chemical Co. 194 B.R. 617 (Bankr. N.D. Ill. 1996). In Hydrox, the parties entered into an agreed order establishing the timing, procedures and estimated value of creditors' pending RICO claims. Id. at 622. "Pursuant to the provisions of 11 U.S.C. § 502(c) and Bankruptcy Rule 3018(a)," the creditors' RICO claims were "estimated and temporarily allowed for voting purposes at two-thirds of the amount claimed, that is at twice the amount of damages instead of three times damages as provided in the RICO statute." Id. at 622 (emphasis added). The bankruptcy court did not accord the creditor's RICO claims the same voting power as other creditors' claims. Under RICO, claimants were potentially entitled to treble damages. However, the court, to ensure voting strength was commensurate with the economic realities of the claims, only permitted each claim two-thirds of a vote. Id. at 628 (holding that because of the uncertainty surrounding the claim coming to fruition, "only two-thirds of each claim was temporarily allowed and counted for voting at the confirmation hearing.").
Judge Gonzalez's decision to limit the number of total voting claims to 15 did not impermissibly deny PBGC joint and several liability. The Voting Procedures Order properly allocated voting rights to PBGC and failed to affect PBGC's claims for other purposes, such as distribution. Judge Gonzalez's decision, more importantly, only limited the voting strength of PBGC, not the fundamental right to vote, and was designed to prevent PBGC from taking over the reorganization process. Judge Gonzalez's comments at the Ballot Correction Hearing emphasize the pragmatic effects of PBGC's voting claim:
Let's deal with the overhanging practical reality of it. It is somewhat absurd for you [PBGC] to vote $76 billion worth of claims. . . . I think for purposes of distribution you certainly have a right to assert the contingent claim in every single estate. But you are capped by what you can recover as to the total amount. So in terms of the full force and effect of having the right to distribution and using the total amount as base in each one of the debtors is logical, because there is an internal capping on what you can recover, and that is what Congress said you should have. But with voting, your rights are fully exercised in the full amount of $76 billion, which would lead [to] an extraordinarily absurd result.
( Comments by Hon. Gonzalez, Ballot Correction Hearing) (PBGC Record, Ex. 17 at 253:17 — 254:12). According to the calculation guidelines set forth in ERISA § 1362(b), the Bankruptcy Court estimated PBGC's total possible distribution, and determined that the potential distribution failed to justify voting strength proportional to a $76 billion claim. See also In re Pension Plan for Employees of Broadway Maint. Corp., 707 F.2d 647, 649 (2nd cir. 1983).
Had Judge Gonzalez not acted in a manner similar to the bankruptcy courts in Matter of Johns-Manville Corp., or In re Hydrox, PBGC would have improperly controlled the vote and confirmation of the reorganization plan to the detriment of other creditors. See In re Armstrong, 294 B.R. 344, 354 (B.A.P. 10th Cir. 2003) ("The policy behind temporarily allowing claims is to prevent possible abuse by plan proponents."). Accordingly, Judge Gonzalez reasonably interpreted the Voting Procedures Order to ensure that, when voting on the Enron Chapter 11 reorganization, PBGC was limited to $321.8 million in claims.
III. CONCLUSION
For the foregoing reasons, Bankruptcy Judge Gonzalez's Order Regarding PBGC's Motion for Ballot Correction or Temporary Allowance for Voting Purposes is AFFIRMED. The Clerk of the Court is requested to close this appeal and remove the case from my docket.
IT IS SO ORDERED.