The Litigation Trust for the Trust Beneficiaries o v. JP MORGAN CHASE et al

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UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
SAN FERNANDO VALLEY DIVISION
In re:
Superior National Insurance Gr
Debtor(s).
CHAPTER 11
Case No.: 1:00-bk-14099-GM
Adv No: 1:13-ap-01099-GM
MEMORANDUM OF OPINION GRANTING IN
PART AND DENYING IN PART
DEFENDANTS’ MOTION TO DISMISS
AMENDED COMPLAINT
The Litigation Trust for the Trust
Beneficiaries of SNTL Corporation and
Certain Affiliates
Plaintiff(s),
v.
JP MORGAN CHASE, JP MORGAN
CHASE BANK N.A.,
Defendant(s).
Date: April 22, 2014
Time: 10:00 a.m.
Courtroom: 303
FILED & ENTERED
MAY 08 2014
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	Gonzalez
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Defendants JPMorgan Chase Bank, N.A. and JPMorgan Chase & Co.
(collectively "Chase") bring a motion to dismiss the amended complaint ("AC") in this
adversary proceeding.
Factual Background
SNTL Holdings Corp. ("SNTL") and its non-insurance subsidiaries (collectively
with SNTL, the "Debtors") filed for chapter 11 relief on April 26, 2000 (# 00-bk-14099-
GM). Also in 2000, SNTL’s five insurance subsidiaries were seized and placed into
conservatorships by state agencies in California and New York.
The Debtor’s primary assets were over $1 billion of net operating loss
carryforwards ("NOLs"). The largest claim against the Debtors was approximately $100
million of senior debt held by a lender group. Chase held about $19 million of this
senior debt.
On June 21, 2002, the Debtors’ Second Amended Chapter 11 Joint Plan of
Reorganization as amended (the "Plan") was confirmed. Bankruptcy case, dkt.709-1;
Exhibit 4 to Declaration of Glenn M. Kurtz filed in support of the Motion. The Plan was
structured to realize value from the NOLs, and thus was shaped by the requirements of
tax law. In essence, Chase acquired all equity in SNTL so that Chase could use the
NOLs to offset its tax liability and then pay most of the value of those tax savings to a
trust created for the benefit of the Debtors’ stakeholders (the "Trust").
Specifically, the Plan provided that Chase would receive 100% of the common
stock of SNTL (which would be converted to a Delaware LLC with the legal name of
Cresta). Under a Second Tax Sharing Agreement ("STS Agreement") executed in
connection with the Plan, Chase was identified as the sole owner of "all [NOLs], tax
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attributes and other income tax benefits attributable to or generated by the Parent
[SNTL] or the Subsidiaries."
Chase issued an Earn Out Note ("EON"; Exhibit 3 to Kurtz Dec.) to the Trust.
The EON provided for Chase to make payments to the Trust under a formula set forth in
the Plan and the EON as the "NOL Utilization Value" (which was essentially designed to
measure the benefit of the NOLs to Chase.) The NOL Utilization Value is defined in the
Plan as:
The excess of (a) the amount of the SNTL Group’s NOLs in existence and
available immediately after the Effective Date (after taking into account
adjustments required by reason of consummation of the Plan, including
reductions required pursuant to Sections 108(b) and 382(l)(5) of the IRC) and
subsequently utilized in JPMC’s federal income tax return multiplied by the
applicable federal income tax rate or rates with respect to the tax year or years in
which such NOLs are utilized, over (b) the Turnaround Amount.
Plan at p. 18:1-7.
The Turnaround Amount was in turn defined as:
The amount determined by the SNTL Acquirer [JPMorgan Chase Bank] in its
reasonable discretion, based on advice from KPMG, which is equivalent to the
estimated future tax liability of, or arising from the ownership of, the SNTL Group,
excluding (i) taxes attributable to operating earnings of the business of
Reorganized SNTL (including the Other Subsidiaries)(the "Reorganized SNTL
Business") and (ii) taxes attributable to the pre-tax economic profit from a sale or
other disposition of the stock of Reorganized SNTL or the Reorganized SNTL
Business.
Plan at p. 23:13-18.
The Complaint
On May 12, 2013, the Trust filed a complaint commencing this adversary
proceeding (the "Complaint"). The Complaint alleged that Chase has had the benefit of
over $2.2 billion in NOL’s from the Debtors, which have resulted in tax savings to Chase
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of over $775 million, yet Chase had not paid anything to the Trust under the EON. The
Complaint sought recovery on:
Count One: Breach of Fiduciary Duty
Count Two: Breach of Contract
Count Three: Breach of Implied Covenant of Good Faith and Fair Dealing
Count Four: Anticipatory Breach of Contract
Count Five: Unjust Enrichment
Count Six: Reformation of the Plan
Initial Motion to Dismiss
Chase brought a motion to dismiss the Complaint. After extensive briefing and a
hearing, on December 19, 2014 this Court entered an order and a memorandum of
opinion (i) denying the motion as to counts two, three, four and six, (ii) granting the
motion as to count one without leave to amend, and (iii) granting the motion as to count
five with leave to amend to a claim for restitution regarding Later Recognized NOLS and
Turned-Around NOLS (each as defined below).
Amended Complaint
The Trust filed the AC on January 7, 2014. The AC has the same counts as the
Complaint, except Count Five has been changed to a claim for restitution as directed by
the Court. These Counts are based on the following allegations contained in the AC
(which are quite similar if not identical to the allegations in the original Complaint):
Chase falsely inflated the Turnaround Amount to reduce its payments under the
EON. Chase has provided information to the Trust indicating that through 2017, Chase
will use $1.35 billion of NOLs relating to losses recognized prior to the effective date of
the Plan ("Pre-Effective Date NOLs"), with the vast majority used in 2002-2006. This
use resulted in tax savings of $469 million, although Chase has calculated a
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Turnaround Amount of $370 million that will substantially reduce the NOL Utilization
Value to be paid to the Trust under the EON. While the audit of Chase’s tax returns for
2003, 2004 and 2005 has been completed, Chase is taking the position that no payment
is due now on the $257 million of tax benefit that Chase received from the $737 million
of Pre-Effective Date NOLs used in these years. Chase has managed its taxes to
maximize its benefit from the NOLs at the expense of SNTL’s stakeholders through its
management of discharge cancellation of indebtedness (COD), misapplication of COD
from California Insurance Guaranty Association ("CIGA"), treatment of reserve
recapture, and lack of proper tax planning to mitigate the trigger of Excess Loss
Accounts.
Additionally, Chase has received the advantage of $900 million of NOLs that
were based on pre-petition operations (i.e., policies issued before the Effective Date),
but were not known to exist at the time the Plan was negotiated and were not included
in the NOL Utilization Value (the "Later Recognized NOLs"). In the post-Effective Date
period, the insurance subsidiaries did not issue new policies, but did increase their loss
reserves on existing policies, thus generating immediate tax savings for Chase. These
$895 million of Later Recognized NOLs have generated approximately $300 million in
tax savings to Chase. Even if, as Chase asserts, these NOLs provide only temporary
benefits, the time benefit of this $300 million in savings over multiple years amounts to
more than $130 million of value to Chase. (The Plan does not mention additions to the
reserves in the post-Effective Date period or allocate the resulting NOLs. Had the
parties been aware of the possibility of additional reserves being created in the post-
Effective Date period, they would have provided for compensation from Chase to the
Trust to prevent a windfall by Chase.) Chase received $68 million in tax benefit from
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the $195 million of Later Recognized NOLs Chase used in years 2003-2005: none of
this savings will be passed on to the Trust.
Furthermore, the Plan does not require Chase to pay interest on the portion of
the NOLs that are ultimately turned around (and thus not included in the NOL Utilization
Value), although Chase will benefit from the time value between utilization and
turnaround. Chase received millions of dollars of time benefit on NOLs that were
utilized by Chase but later subject to turnaround. (The Court will refer to these NOLs as
"Turned-Around NOL’s").
Motion
Chase filed this motion to dismiss the AC (the "Motion") on February 7, 2014, the
Trust filed an opposition to the Motion (the "Opposition") on March 4, 2014 and Chase
filed a reply to the Opposition (the "Reply") on March 21, 2014.
Legal Standard for Motion to Dismiss
This motion to dismiss is brought under Fed. R. Civ. P. 12(b)(6), which applies to
this adversary proceeding pursuant to Fed. R. Bankr. P. 7012(b).
A motion to dismiss [pursuant to Rule 12(b)(6)] will only be granted if the
complaint fails to allege "enough facts to state a claim to relief that is plausible on
its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 167 L.
Ed. 2d 929 (2007). "A claim has facial plausibility when the plaintiff pleads factual
content that allows the court to draw the reasonable inference that the defendant
is liable for the misconduct alleged. The plausibility standard is not akin to a
‘probability requirement,’ but it asks for more than a sheer possibility that a
defendant has acted unlawfully." Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937,
1949, 173 L. Ed. 2d 868 (2009) (citations omitted).
"We accept factual allegations in the complaint as true and construe the
pleadings in the light most favorable to the non-moving party." Manzarek [v. St.
Paul Fire & Marine Ins. Co.], 519 F.3d [1025,] 1031 [(9th Cir. 2008)]. Although
factual allegations are taken as true, we do not "assume the truth of legal
conclusions merely because they are cast in the form of factual allegations." W.
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Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981). Therefore, "conclusory
allegations of law and unwarranted inferences are insufficient to defeat a motion
to dismiss." Adams v. Johnson, 355 F.3d 1179, 1183 (9th Cir. 2004) (internal
quotation marks and citation omitted); accord Iqbal, 129 S. Ct. at 1950.
Fayer v. Vaughn, 649 F.3d 1061, 1064 (9th Cir. 2011). The court likewise is not
required to accept as true allegations that are contradicted by documents referred to in
the complaint. Twombly, 550 U.S. at 555-56; Steckman v. Hart Brewing, Inc., 143 F.3d
1293, 1295-96 (9th Cir. 1998).
Count One: Breach of Fiduciary Duty
Complaint
The Plan and the EON reflect a joint venture between Chase and the Trust to
realize and share the value of SNTL’s NOLs. This joint venture imposes a fiduciary duty
on Chase. Chase has breached this fiduciary duty by managing SNTL’s tax attributes
to benefit Chase at the expense of the Trust and SNTL’s other stakeholders, as
described above.
Motion
This Court dismissed this count without leave to amend, yet the Trust simply put
it into the AC exactly as it was in the Complaint. This count should be dismissed and
numerous allegations supporting this count should be stricken. (These allegations are
listed in note 4 of the Motion (pp. 9-10).) Without Count One, these allegations are
irrelevant to the remaining counts and will only serve to confuse the issues in dispute,
unnecessarily broaden the scope of this case and risk undue expansion of discovery.
Fed. R. Civ. P. 12(f) permits the Court to strike "any redundant, immaterial, impertinent,
or scandalous matter."
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Opposition
This count is in the AC solely for the purpose of appeal, which is permissible.
While Lacey v. Maricopa County, 693 F.3d 896 (9th Cir. 2012) holds that claims
dismissed with prejudice need not be repled to be preserved for appeal, it does not
prohibit repleading such claims. Taylor ex rel. Thomson v. Zurich Am. Ins. Co., 2013
U.S. Dist. LEXIS 46800 (D. Ariz. Apr. 1, 2013).
The "drastic remedy" of striking the allegations in support of Count One is not
warranted. There is no confusion over the issues at dispute and Chase has
demonstrated its ability to object if discovery exceeds the scope of this case. The
allegations Chase seeks to strike support other counts and provide background
information bearing on the subject matter of this litigation. In sum, striking these
allegations would prejudice the Trust; not striking them would not prejudice Chase.
Reply
The Ninth Circuit in Lacey explicitly rejected the Trustee’s argument that this
dismissed claim should be retained for purposes of appeal. The Taylor case cited by
the Trustee is not binding and it is contrary to the weight of Ninth Circuit authority
precluding a plaintiff from including a claim dismissed with prejudice in an amended
complaint. Repleading dismissed claims wastes the resources of both defendants and
courts that must address them, and accordingly has been held to be sanctionable.
The Court should also strike the allegations supporting this breach of fiduciary
duty claim. References to fiduciary duty and joint venture are confusing the context of
the parties’ contractual relationship. They are also immaterial and impertinent under
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Rule 12(f). Incorrect allegations of fiduciary duty do not provide proper background
information. The allegations in paragraphs 86 and 94 about Chase’s purported duty to
maximize the value of the NOLs are not relevant to Chase’s contractual obligations now
before the Court. The Trustee’s Opposition does not explain why terming the EON an
"equity-like instrument" is relevant to its remaining claims; it is merely confusing. The
Trust will not be prejudiced by eliminating this irrelevant material, except by the
inconvenience of redrafting the AC.
Analysis
Count One should be removed from the Trust’s complaint in this proceeding.
Lacey clearly holds that claims dismissed with prejudice and without leave to amend
need not be repled in a subsequent complaint in order to be preserved for appeal. I will
dismiss it again, although "with prejudice and without leave to amend" so that it clearly
falls within the Lacey safe harbor for appeal.
With respect to Chase’s motion to strike the allegations supporting Count One
under Fed. R. Civ. P. 12(f):
Rule 12(f) provides that a court "may order stricken from any pleading . . . any
redundant, immaterial, impertinent, or scandalous matter." "(T)he function of a
12(f) motion to strike is to avoid the expenditure of time and money that must
arise from litigating spurious issues by dispensing with those issues prior to trial. .
. ." Sidney-Vinstein v. A.H. Robins Co., 697 F.2d 880, 885 (9th Cir. 1983).
"'Immaterial' matter is that which has no essential or important relationship to the
claim for relief or the defenses being pleaded." 5 Charles A. Wright & Arthur R.
Miller, Federal Practice and Procedure § 1382, at 706-07 (1990). "'Impertinent'
matter consists of statements that do not pertain, and are not necessary, to the
issues in question." Id. at 711. Superfluous historical allegations are a proper
subject of a motion to strike. See, e.g., Healing v. Jones, 174 F. Supp. 211, 220
(D. Ariz. 1959).
Fantasy, Inc. v. Fogerty, 984 F.2d 1524, 1527 (9th Cir. 1993)(reversed on other
grounds, Fogerty V. Fantasy, Inc., 510 U.S. 517 (1994)). As a general matter, Rule
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12(f) motions are disfavored. See, e.g., Abney v. Alameida, 334 F. Supp. 2d 1221,
1234 (S.D. Cal. 2004) (citing Cairns v. Franklin Mint Co., 24 F. Supp. 2d 1013, 1037
(C.D. Cal. 1998)). They are generally denied unless the allegations have no possible
relation to the subject matter. See, e.g., Colaprico v. Sun Microsystems, Inc., 758 F.
Supp. 1335, 1339 (N.D. Cal. 1991); Code Rebel, LLC v. Aqua Connect, Inc., 2014 U.S.
Dist. LEXIS 2824 (C.D. Cal. Jan. 3, 2014).
Some of the allegations Chase moves to strike directly and specifically reference
a breach of fiduciary count that is no longer part of this proceeding. These allegations,
which may be struck without prejudice to the Trust, are, in addition to Count One itself:
(i) the reference to Count One in paragraph (b) of the prayer for relief, which should be
omitted, (ii) the use of "fiduciary" in the first sentence of the AC, which can be remedied
by striking "fiduciary and contractual" leaving an unmodified "obligations", (iii) the
reference to "joint venture" in the ¶19 of the AC which can be replaced with a more
general word or phrase, and (iv) the reference to "co-venturer" in ¶20 of the AC, which
can be replaced with a more general word or omitted from the paragraph.
The remaining allegations that Chase moves to strike may support remaining
counts in this proceeding or provide background information. (These are ¶19, part of
the first sentence of ¶20, the first sentence of ¶86, and part of the first sentence of ¶94.)
It cannot be said that these allegations have no possible relation to the subject matter,
and if ultimately irrelevant will not be considered. Given the liberal standards for
pleadings, the disfavor with which motions to strike are viewed and the fact the striking
this material may prejudice the Trust, these allegations in the AC will not be struck.
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Count Five: Unjust Enrichment
Complaint
Chase has received the benefit of $895 million of Later Recognized NOLs,
enabling Chase to reduce its tax liability by approximately $313 million. Even if these
benefits are limited in term and Chase will ultimately be required to recognize income in
the future, the time value of this money is over $130 million.
With respect to the Turned-Around NOLs, Chase receives substantial time value
between receiving the tax benefit of these NOLs and the turn around. Under the Plan,
however, Chase does not pay interest to the Trust to compensate for this time value.
Through its use of the Later Recognized NOLs and the time value of the Turned-
Around NOLs, Chase has been unjustly enriched at the expense of the Trust and its
beneficiaries.
Motion
Black letter law denies a claim for restitution where there is a valid contract
between the parties covering the subject matter. Subject matter should be interpreted
broadly as referring to the general subject matter of the contract, rather than any
specific term. Both of the AC's grounds for restitution are covered by the general
subject matter of the Plan.
The Plan provides that the Trust be paid interest only on Distributable NOL
Utilization Value. Plan at 28. Interest on the non-distributable portion of the NOLs is
covered by the Plan by its exclusion from amounts due to the Trust. As a matter of law,
Chase cannot be unjustly enriched by paying interest in accordance with the express
provisions of the Plan.
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Unjust enrichment on the Later Recognized NOLs is also wrong – the Plan
unambiguously excludes these NOLs from the NOL Utilization Value by covering only
NOLs "in existence and available immediately after the Effective Date." Plan at §1.1.
The drafting history of the Plan shows that an earlier, broader definition of NOL
Utilization Value, which would have included these Later Recognized NOLs, was
ultimately replaced by the current, narrower definition.
Opposition
Under Ninth Circuit case law, a contract that does not provide for the specific
recovery sought does not bar a claim for restitution. Further, when the parties dispute
the scope of the subject matter of a contract, it is improper to dismiss a restitution claim
at the pleading stage.
Chase claims, contrary to earlier expectations, that the Turnaround Amount will
be substantial and will wipe out most of the NOL Utilization Value. If true, then Chase
still has received hundreds of millions of dollars of time value of money. The Plan
neither anticipated nor addressed this situation. Further, a reading of the Plan and the
EON provisions beyond Chase’s carefully selected excerpts indicates that the Plan and
EON do not address interest on the Turned-Around NOLs.
The change in definition of the NOLs to be included in Utilization Value was likely
intended to exclude NOLs from post-confirmation operations, not the Later Recognized
NOLs arising from pre-confirmation operations. The drafting history and intent of this
provision cannot be determined merely from the term sheets cited by Chase in isolation,
but require discovery and a full exposition of the evolution of the Plan and the parties’
negotiations.
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Chase’s interpretation of the Plan – that it was intended to allow Chase to retain
hundreds of missions of dollars of benefit from the Later Recognized NOLS and the
time value of the Turned-Around NOLs, as well as a $30-60 million fee– is implausible.
Reply
As the Court has recognized, a restitution claim cannot be maintained where
there is a valid contract covering the same subject matter. "Subject matter" must be
broadly defined, lest parties use restitution to rewrite contracts. Leyvas v. Bank of Am.
Corp. (In re Countrywide Fin. Corp. Mortg. Mktg. & Sales Practices Litig.), 601 F. Supp.
2d 1201, 1220-1221 (S.D. Cal. 2009), the only authority cited by the Trust for its
argument that "subject matter" should be narrowly defined is not binding on this Court
and is factually distinguishable because the unjust enrichment claims were based on
pre-contractual misrepresentations.
Contrary to the Trust’s assertion that it is improper to dismiss a restitution claim
at the pleading stage, courts routinely dismiss restitution claims where, as here, the
parties dispute the subject matter of the contract.
With respect to interest on the Turned-Around NOLS, in the EON the Trust
agreed that it was only entitled to receive interest on the Distributable NOL Utilization
Value, thereby intentionally excluding interest on NOL use that was subsequently turned
around and thus not distributable:
Limited Obligations of [Chase]. The Holder [of the EON] by acceptance of this
Note unconditionally acknowledges and agrees that it shall only be entitled to
receive payments of Distributable NOL Utilization Value and any interest thereon
under this Note in accordance with the provisions of and at the times provided in
the Plan.
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EON (ex. 2) at ¶ 6. Under the Trust’s reading of the EON (that it did not cover interest
on the Turned-Around NOLs), this provision would be rendered meaningless. The
Trust is simply seeking additional consideration under the EON.
The Later Recognized NOLs are likewise covered by the Plan, which defines
"NOL Utilization Value" as only those "NOLs in existence and available immediately
after the Effective Date." Plan (exh. 4) at 18. The Trust argues that restitution is proper
because the parties did not anticipate the Later Recognized NOLs, but the standard is
not whether parties anticipate a specific event, it is whether the parties have a valid
contract covering the subject matter. The Trust’s argument that the phrase "in
existence and available immediately after the Effective Date" was intended only to
"exclude NOLs that resulted from Reorganized SNTL’s post-confirmation operations" is
contradicted by both the definition of Turnaround Amount and the drafting history of this
provision.
While the Trust asserts that consideration of draft term sheets is improper at this
stage, Chase may refer to any documents referred to in the AC, as a matter of law.
Analysis
A restitution action claim is barred if there is a valid contract between the parties
governing the same subject matter. While the Plan did not specifically address the
Later Recognized NOLs or interest on the Turned-Around NOLs, these items may
nonetheless be within the subject matter of the Plan in a way that precludes a claim for
restitution.
As the arguments of both sides make clear, determining whether the Later
Recognized NOLs and interest on the Turned-Around NOLs are within the subject
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matter of the Plan and EON will turn on questions of contractual interpretation and may
well require evidence of the history and intent of these contracts. The Plan and the
EON are more equivocal on this issue than Chase argues. For instance, Paragraph 6
of the EON does not appear to directly address entitlement to interest, but rather is a
more general boilerplate provision limiting Chase’s obligations under the EON to those
specifically described. Furthermore, “interest” and “time-value” are not the same.
Interest is designed to compensate for time value and a given interest rate may closely
(or not so closely) approximate the actual time value, but the concepts remain distinct.
Finally, the real issue with Chase’s use of the certain draft term sheets is not whether
Chase can introduce them in this motion to dismiss, but whether they can be considered
apart from the rest of the history and other context of the EON and the Plan.
Thus, this Court will follow case law in this Circuit holding that, where the
restitution recovery sought is not specifically or unequivocally covered by contract, it is
improper to dismiss a restitution claim at the pleading stage. Ellis v. J.P. Morgan Chase
& Co., 950 F. Supp. 2d 1062, 1091 (N.D. Cal. 2013)("Despite Defendants' arguments
that the mortgage agreements preclude the claim here, the Court finds it is premature
for the Court to take a position on whether this action derives from the subject matter of
the agreements such that a claim for unjust enrichment is unavailable."); Stitt v.
Citibank, N.A., 942 F. Supp. 2d 944, 960 (N.D. Cal. 2013)("it is premature to for the
Court to take a position on whether the action derives solely from the agreements
alleged."); see also Countrywide, 601 F. Supp. 2d at 1220-1221 ("Although there are
contracts at issue in this case, none appears to provide for the specific recovery sought
by Plaintiffs' unjust enrichment claim.") Although the actions in Ellis and Stitt did contain
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RICO fraud allegations, these allegations did not appear to affect at least the Ellis’
decision’s analysis on this point.
In sum, given the dispute over the subject matter coverage of the Plan and the
EON, dismissal of the restitution claim at the pleading stage is premature.
Count Six: Reformation of the Plan
Complaint
The Complaint alleges that the parties contemplated that the Turnaround Amount
was expected to be zero or a nominal amount and if the Plan contains language that
enables Chase to declare a substantial Turnaround Amount that materially reduces the
NOL Utilization Value, then the Plan was based on a mutual mistake (by Chase, the
Creditors’ Committee and the Debtors) or unilateral mistake (by the Creditors’
Committee and the Debtors) and should be reformed to express the intention of the
parties. Likewise, if the Plan is structured to enable Chase to use the Later Recognized
NOLs without compensating the Trust, it fails to express the intent of the parties, is a
mutual or unilateral mistake and should be reformed. If the mistakes were unilateral on
the part of the Debtors and the Creditors, then Chase knew or suspected their mistake.
Motion
Such a reformation would be a modification of the Plan under §1127, which is the
sole means of modifying a plan of reorganization. The Plan has been substantially
consummated and thus cannot be modified under §1127. In its decision not to dismiss
this count in the Complaint, the Court relied on Motor Vehicle Cas. Co. v. Thorpe
Insulation Co. (In re Thorpe Insulation Co.), 677 F.3d 869, 882 (9th Cir. Cal. 2012), to
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determine that the Plan had not been substantially consummated. Chase did not have
the opportunity to brief Thorpe because the Trust had not disputed that the Plan had
been substantially consummated and had not relied on Thorpe.
Under the Ninth Circuit standards of Thorpe, the Plan has been substantially
consummated (and other Ninth Circuit precedent supports this conclusion). Under
§1101(2)(A), all property to be transferred (to or from the Debtor, which is the focus of
this prong) under the Plan has been transferred: the stock of SNTL was transferred to
Chase and the EON was transferred to the Trust. Under §1101(2)(B), there has been
an assumption by the successor to the Debtor (Chase) of the business or management
of all or substantially all of the property to be dealt with under the Plan, which is not
disputed by the Trust. Under §1101(2)(C), distributions to creditors under the Plan have
also commenced by way of the distribution of Litigation Trust Certificates to SNTL
creditors and the payment of administrative claims. Therefore, the Plan may not be
reformed.
Finally, the Plan provides that it may not be amended without the consent of
Chase. Plan §12.8.
Opposition
Chase is asking for reconsideration of the Court’s December ruling on this count
in the original Complaint under Fed. R. Civ. P. 54(b), but motions for reconsideration
under Rule 54(b) should not be granted absent unusual circumstances, such as newly
discovered evidence, clear error or manifest injustice, or intervening change in law. The
current circumstances do not justify reconsideration. Chase is essentially urging the
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Court to ignore Thorpe in favor of earlier decisions that are either unpublished or from
lower courts.
Reply
Ninth Circuit case law holds that, under Rule 54, the Court has the power to
reconsider and modify its interlocutory orders at any time prior to entry of final judgment.
The Trust does not dispute that reformation of the Plan is a modification that can
only be pursuant to §1127(b) and that under §1127(b) the plan cannot be modified if it
has been substantially consummated. The Trust does not dispute that two of the three
requirements for substantial consummation have been met.
The Trust is disputing only whether "substantially all of the property proposed by
the Plan to be transferred’ has been transferred." §1101(2)(A). This requirement
addresses transfers of "property of the debtor" and Thorpe, which is relied upon by the
Trust, is distinguishable on this basis. While both this case and Thorpe focus on
transfers made to a trust for the benefit of creditors, in Thorpe, unlike this case, the
transfers were from the debtors. Because the Thorpe transfers were settlement
payments owed to the debtors by insurance companies, the Thorpe plan specifically
contemplated that the debtors would transfer assets to the trust subsequent to the
effective date (whenever received by the debtors). In this Plan, it was contemplated
that all estate property to be transferred would be transferred as of the Effective Date.
Contrary to the Trust’s assertions, the NOLs cannot be property of the estate
proposed to be transferred that have not yet been transferred, because there is no
longer a bankruptcy estate and the NOLs were transferred to Chase at confirmation.
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The EON payments are payments on a debt instrument, not "transfers of estate
property" under §1101(2)(A). The Ninth Circuit B.A.P. has adopted the reasoning of In
re Hayball Trucking, Inc., 67 Bankr. 681 (Bankr. E.D. Mich. 1986), and its progeny in
Antiquities of Nevada v. Bala Cynwyd Corp. (In re Antiquities of Nevada, Inc.), 173 B.R.
926 (B.A.P. 9th Cir. 1994), which held that transfers under §1101(2)(A), such as this
issuance of the EON, must be distinguished from distributions from creditors under
§1101(2)(C). Indeed, the Ninth Circuit modified its Thorpe opinion to delete a reference
to the small amount so far distributed to creditors.
Finally, under §12.8 of the Plan, the Trust cannot modify the Plan without the
consent of Chase. This requirement is not inconsistent with §1127(b) restricting
modification to plans not substantially consummated. Disregarding Chase’s rights in
this regard violates the contract interpretation canon that terms should not be rendered
superfluous. Any duty of good faith and fair dealing cannot alter the express terms of
the contract and so cannot limit Chase’s right to withhold consent to modification.
Analysis
As Thorpe was not raised in the Opposition to the original motion to dismiss and
Chase had no reason to brief it, the Court will hear this issue.
The Bankruptcy Code defines substantial consummation as: (A) transfer of all or
substantially all of the property proposed by the plan to be transferred; (B) assumption
by the debtor or by the successor to the debtor under the plan of the business or of the
management of all or substantially all of the property dealt with by the plan; and (C)
commencement of distribution under the plan. 11 U.S.C. §1101(2)(emphasis added).
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At issue in this motion is identification of "property proposed to be transferred."
Chase argues that this prong addresses transfers to or from the debtor at or near
confirmation. For Chase the relevant transfers were (i) the stock of the Debtor to Chase
and (ii) the EON and other rights transferred to the Trust, in each case at or about
confirmation. For the Trust, the relevant transfers are payment of moneys by Chase to
the Trust arising from NOL Utilization, as provided for in the Plan and the EON, None of
these payments to the Trust have yet been made, so if these payments are "transfers"
under §1101(2)(A), substantially all transfers have not been made and the Plan has not
been substantially consummated.
One clarification will make this analysis simpler: transfers under §1101(2)(A)
clearly do not mean payments to creditors by the Trust – these are the "distributions"
contemplated by the third prong of the substantial contribution test in §1101(2)(C). See,
e.g., Antiquities of Nevada, 173 B.R. 926. (The language from Annotico v. Marina City
Club, L.P. (In re Marina City Club, L.P.), 1998 U.S. App. LEXIS 13407 (9th Cir. June 18,
1998), that Chase quotes in its briefs is interpreting §1101(2)(C), which is not at issue.)
This distinction between the transfers of subsection (A) and the distributions of
subsection (C) is the main holding of the Hayball Trucking line of cases, which the
B.A.P. adopted in Antiquities of Nevada. It also appears to be the reason why the Ninth
Circuit removed the reference to distributions to creditors from its Thorpe opinion
interpreting §1101(2)(A).
Chase interprets §1101(2)(A) as being restricted to transfers of "property of the
estate" or "to or from the debtor" but the statute contains no such restriction. Chase
relies on language from Hayball Trucking that defines transfers under §1101(2)(A) as:
"transfers of property to or from the debtor at or near the time the plan is confirmed
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undertaken to share the new financial structure of the debtor." 67 B.R. at 684. The
B.A.P. had quoted this language in Antiquities (173 B.R. at 930), but that phrase is not
directly relevant to the main holding in Antiquities, which (as noted above) distinguishes
between "transfers" under §1101(2)(A) and "distributions" under §1101(2)(C). Most
importantly, the Ninth Circuit in Thorpe analyzed transfers under §1101(2)(A) without
reference to Hayball Trucking, (the now twenty-year-old) Antiquities of Nevada, or the
restrictions relied upon by Chase.
For the Ninth Circuit in Thorpe, the dispositive fact under §1101(2)(A) was that
only $135 million of $600 million of settlement proceeds had been transferred to the
post-confirmation trust. This $600 million was to be paid by thirteen insurers pursuant
to settlements the debtors had reached with these insurers. Under the Plan, the
debtors had contributed the proceeds of these settlement agreements to the trust at
confirmation. In other words, the debtors’ confirmation transfer of their rights to
proceeds under these settlement agreements was not the ultimate transfer under
1101(2)(A). For the Ninth Circuit, the payment on these settlement agreements was the
property that had to be substantially all transferred under §1101(2)(A) for substantial
consummation. The Thorpe debtors’ contribution of their rights to proceeds under the
settlements to the post-confirmation trust under the plan is analogous to the issuance of
the EON to the Trust. Under the Thorpe analysis, only upon payment under these
contracts will transfers occur.
Chase struggles to distinguish Thorpe by arguing that the insurance settlement
payments made after the effective date would actually be transferred by the Thorpe
debtors to the trust. Thus, all these post-effective date payments in Thorpe would be
made by the debtors (which is not the case here). This analysis seems strained. It
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relies on reading into §1101(2)(A) a requirement that the transfers be "to or from the
debtor," which (as noted above) is not supported by the statutory language or current
case law. Further, Chase selectively quotes from provisions of the Thorpe plan and
trust agreement to suggest that post-effective settlement payments would be made
through the debtors to the post-confirmation trust, but other sections of the plan and
trust agreement suggest that these payments would not be made through the debtors.
See, e.g., Thorpe Plan (exh. I to Schmidt Dec.) at 40:5-6 ("the Debtors automatically
and irrevocably transfer to the Trust all of their Asbestos Insurance Rights").
Payments of NOL Utilization Value to the Trust are simply too similar to the
payments of insurance settlement proceeds to the post-confirmation trust in Thorpe for
this Court to conclude that the substantially all transfers of property have been made
under §1101(2)(A).
I am a bit puzzled by Chase’s argument that since the Plan provides that it
cannot be amended without Chase’s consent, it may not be reformed without Chase’s
consent. Put another way, Chase appears to be arguing that if reformation is a
modification for §1127 purposes, it is also a modification for state contract law
purposes. This is incorrect. A modification is an agreement by the parties to change
the terms of the contract (Cal. Civ. Code §1698), while reformation is an equitable
remedy to fraud or certain mistakes (Cal Civ. Code §3399). "A declaration of the rights
and obligations under a contract which results in a reformation is but a determination of
the intention of the parties and of the legal effect of the contract, not a modification of its
terms." Putnam v. Putnam, 51 Cal. App. 2d 696, 699 (Cal. App. 1st Dist. 1942); see
also Nongard v. Scott, 176 Cal. App. 2d 650, 656 (Cal. App. 2d Dist. 1959); Steeve v.
Yaeger, 145 Cal. App. 2d 455 (Cal. App. 4th Dist. 1956).
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Conclusion
The motion is granted with respect to Count One, which is dismissed with
prejudice and without leave to amend, and with respect to the following allegations
supporting Count One, which are struck as follows:
a. the reference to Count One in paragraph (b) of the prayer for relief, which
should be omitted,
b. the use of "fiduciary" in the first sentence of the AC, which can be
remedied by striking "fiduciary and contractual" leaving an unmodified
"obligations",
c. the reference to "joint venture" in ¶19 of the AC, which can be replaced
with a more general word or phrase, and
d. the reference to "co-venturer” in ¶20 of the AC, which can be replaced
with a more general word or omitted from the paragraph.
The motion is otherwise denied.
The Trust is to file an amended complaint, amending the AC only as outlined above,
by April 30, 2014.
Chase is to file an answer no later than May 15, 2014.
###
Date: May 8, 2014
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