Wolverine Proctor & Schwartz, LLC

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UNITED STATES BANKRUPTCY COURT
FOR THE
DISTRICT OF MASSACHUSETTS
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In re
WOLVERINE PROCTOR & SCHWARTZ, LLC, Chapter 7
Debtor Case No. 06-10815-JNF
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MEMORANDUM
I. INTRODUCTION
The matters before the Court are the Trustee’s Motion to Approve Settlement
Agreement Regarding Pension Benefit Guaranty Corporation Claims (the “Motion”) and
the Objection of Peter A. Crawford (“Crawford”) to that Motion. Both the Chapter 7
Trustee of Wolverine Proctor & Schwartz, LLC (the “Debtor”) and the Pension Benefit
Guaranty Corporation (the “PBGC”) filed responses to Crawford’s Objection, and the
Court heard the matters on February 24, 2009. The issue presented is whether the Trustee’s
proposed settlement is fair and reasonable and is in the best interests of creditors in view
of the obstacles, expense and delays associated with litigating the amount of the PBGC’s
claims.
II. BACKGROUND
The Debtor filed a voluntary Chapter 7 petition on April 1, 2006. Over 40 years
before it filed its Chapter 7 petition, it had established the Proctor & Schwartz Salaried
Employees Retirement Plan to provide retirement benefits to certain employees.
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According to the Trustee, the Debtor was the administrator of the plan to which Title IV
of the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001, et seq. applied
(ERISA); that pursuant to 11 U.S.C. § 704(11) she was charged with performing the Debtor’s
obligations as administrator of the ERISA plan; that all benefits under the plan were frozen
as of December 31, 1997; that as of January 1, 2005, only 67 employees of the Debtor were
covered by the plan; and that as of the date of the filing of the petition, almost all of the
Debtor’s operations had ceased and all employees were terminated, with the exception of
certain key employees who were retained briefly without benefits.
On December 9, 2008, the Trustee filed her Motion seeking approval of the
Settlement Agreement regarding the PBGC’s claims. In her Motion, the Trustee disclosed
that, in January 2007, the PBGC advised her that the administrative process to terminate
the plan was under way and that, shortly after receiving that advice, the PBGC issued a
Notice of Determination under 29 U.S.C. § 1342(a) that the plan had not met the minimum
funding standard required under § 412 of the Internal Revenue Code. The Trustee also
disclosed that the PBGC informed her that the plan would be unable to pay benefits when
due and that it must be terminated under 29 U.S.C. § 1342(c). The Trustee further revealed
that, on or around March 26, 2007, she and the PBGC executed an Agreement for
Appointment of Trustee and Termination of Plan pursuant to which the plan was
terminated as of April 1, 2006, the PBGC was appointed trustee of the plan, and the Trustee
agreed to deliver all records, assets or property of the plan to the PBGC.
Before the execution of the Plan Termination Agreement and the expiration of the
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applicable bar date for filing proofs of claim, the PBGC filed three proofs of claim:
Claim No. 70 pursuant to which the PBGC asserted a claim, contingent upon
plan termination, estimated in the amount of $6,991,500 for unfunded benefit
liability, including an unliquidated amount as a priority claim;
Claim No. 71 pursuant to which the PBGC asserted a claim in the amount of
$2,012.393 for minimum funding contributions, of which $1,340,217 was
entitled to priority; and
Claim No. 72 in which the PBGC asserted entitlement to an unliquidated
priority amount for premiums on account of the plan.
In attachments to each of its proofs of claim, the PBGC stated that its investigation was
continuing and that it reserved its right to “amend, modify and supplement this proof of
claim and/or to file additional proofs of claim.”
In her Motion to Approve Settlement, the Trustee recounted the exchange of
information among herself, her accountants, and the PBGC, including data, calculations
and actuarial analyses with respect to the claims, and she stated that she objected to the
proofs of claim filed by the PBGC. According to the Trustee, she disputed the PBGC’s
assertions that portions of its claims were entitled to administrative expense or priority
treatment, the method of calculating the claims, the lack of documentation supporting the
claims, and the potential overlap and duplication of the claims.
Based upon her investigation of the claims, and various reports prepared by the
PBGC, which she attached to her Motion (the “Actuarial Reports”), as well as the costs,
delays and complexity of litigating her objections to the PBGC’s claims in view of the
myriad legal issues relating to claims under ERISA, including the appropriate discount rate
and unsettled case law, the Trustee filed the Motion to Approve Settlement Agreement.
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Pursuant to that Motion, she asked the Court to approve the allowance of PBGC’s claims
as follows:
An Unpaid Minimum Funding Contribution Claim in the amount of $50,000
as an unsecured priority claim;
An Unfunded Benefit Liabilities Claim (the “UBL Claim”) in the amount of
$8,399,500 as a general unsecured claim; and
A Plan Premiums Claim in the sum of $101,084.25 as a general unsecured
claim.
Crawford objected. He complained 1) that there was no indication that the PBGC
provided the Trustee with more information than that which she attached to her Motion,
namely the Actuarial Reports; 2) that, even though his review of the fee application of the
Trustee’s accountant, Verdolino & Lowey, revealed that considerable pension-related
activities were on-going in 2007, “[t]here is no indication that this extensive review resulted
in any changes to the PBGC’s claims;” 3) that the UBL claim (set forth in the amount of
$8,449,500 on the Unpaid Minimum Funding Contributions and Unfunded Benefits Report
attached to the Trustee’s Motion) was higher that the original estimate of $6,991,500 by
$1,458,000; 4) that the PBGC had not filed amended proofs of claim; and 5) that “the 2004
annual report of Wolverine Proctor LLC, the ultimate parent of Wolverine, Proctor &
Schwartz, Inc., the Debtor’s predecessor, . . . indicates an unfunded liability of $5.885
million . . . calculated using a 6.5% discount rate,” which is $2.564 million less than the
PBGC’s UBL claim calculated 15 months later. Crawford also complained that the actuarial
assumption that the Debtor’s work force was half male and half female was incorrect as the
work force of the Debtor’s predecessor was predominately male.
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Crawford attached a copy of three pages (pages 19-21) of the Consolidated1
Financial Statements of Wolverine Proctor LLC and Subsidiaries for the years ended
December 31, 2004 and 2003 to his Objection.
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Based upon his observations, Crawford did not contest the Trustee’s decision to
settle the Unpaid Minimum Funding Contribution Claim or the Plan Premium Claim.
Rather, he challenged settlement of the UBL claim, arguing that due process precludes the
allowance of the PBGC’s claims in excess of the amounts stated in their original claims,
citing In re U.S.Airways Group, Inc., 303 B.R. 784, 787 n.2 (Bankr. E.D. Va. 2003).
Additionally, he asked the Court to infer that the perceived lack of supporting information
attached to the Trustee’s Motion was indicative of the PBGC’s successful effort to coerce
the Trustee into settlement “by stonewalling, inducing settlement for an inflated amount
by largely giving up its essentially frivolous assertions of administrative and tax priorities.”
Crawford also juxtaposed a $482,500 contribution to the plan made by the Debtor’s
predecessor in 2005, reflected in the consolidated financial statements for the Debtor’s
predecessor, with a $352,500 contribution set forth in the Pension Information Profile1
prepared by the PBGC. He did not disclose, however, that the $482,500 contribution was
“expected” to be made, and he did not submit evidence that a contribution in that amount
was actually made in 2005.
In addition to the issues raised above, Crawford maintained that the discount rate
used to calculate the PBGC’s claims should be higher and determined with reference to
bankruptcy law principles. He also asserted that the UBL Claim was computed
improperly, that the Actuarial Reports are opaque, and that the assumptions used in them
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He stated:2
The erroneous assumption as to the makeup, by sex, of the plan
participants is a possible explanation of a significant portion of the $2.564
million gap between what the PBGC asserts is the unfunded liability and
that stated in the 2004 financial statements of the debtor’s predecessor.
Some of the remainder may be due to the 5.6% discount rate used by the
PBGC vs. the 6.5% used in the 2004 financial statements, which is
estimated by Mr. Crawford to account for roughly $750,000. In addition,
the set of “fudge factors” that appear in section C. of the “Estimated Value
of Guaranteed Liabilities” spreadsheet account for approximately $1.8
million. The validity of these factors cannot be ascertained from the
information provided.
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are demonstrably wrong, again pointing to the greater number of male employees covered
by the plan than female employees.2
Crawford also contested the $10,660,054 value ascribed to the plan assets in the
Actuarial Reports. He maintained that the PBGC and the Trustee merely extrapolated the
assets of the plan to April 1, 2006 based upon the assets in the plan 15 months earlier. He
asserted that this was “contrary to the statute . . . and the likelihood that returns may have
deviated substantially from those projected.”
As noted above, both the Trustee and the PBGC responded to Crawford’s objection
and addressed the various factual issues he raised. The Trustee argued that the Settlement
Agreement had to be viewed in its entirety with reference to the reduction of more than
one million in priority claims originally asserted by the PBGC. Moreover, she maintained
that there were no significant errors in the PBGC’s reports, and Crawford’s assertion that
she was coerced into settlement was baseless. Additionally, she noted that “the gender
ratio assumption of plan participants is reasonable inasmuch as increasing the gender ratio
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to 80% male as Crawford argued, would actually increases the PBGC’s UBL claim. The
PBGC supported the Trustee’s arguments.
III. DISCUSSION
A. Standard for Approval of Compromises
In In re High Voltage Eng’g Corp., 397 B.R. 579 (Bankr. D. Mass. 2007), aff’d, __ B.R.
__, 2008 WL 987502 (D. Mass. April 14, 2009), this Court set forth the standard for approval
of settlements under Fed. R. Bankr. P. 9019, quoting In re Healthco Int’l, Inc., 136 F.3d 45
(1st Cir.1998). This Court stated:
The bankruptcy court essentially is expected to “‘assess [ ] and
balance the value of the claim[s] ... being compromised against
the value ... of the compromise proposal.’” Jeffrey v. Desmond,
70 F.3d 183, 185 (1st Cir.1995) (citation omitted). It may
consider, among other factors: (1) the probability of success
were the claim to be litigated-given the legal and evidentiary
obstacles and the expense, inconvenience and delay entailed in
its litigation-measured against the more definitive, concrete
and immediate benefits attending the proposed settlement, see
Kowal v. [Malkemus (In re Thompson)], 965 F.2d [1136] at 1141
n. 5, 1145 [(1st Cir.1992)] (so-called “best interests” standard);
(2) a reasonable accommodation of the creditors’ views
regarding the proposed settlement; and (3) the experience and
competence of the fiduciary proposing the settlement. See
Jeffrey, 70 F.3d at 185; In re Texaco, Inc., 84 B.R. 893, 902
(Bankr.S.D.N.Y.1988) (citing Protective Committee for Indep.
Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S.
414, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968)).
Id. at 50. See also In re Fibercore, Inc., 391 B.R. 647 (Bankr.D.Mass.2008).
“When considering . . . [a settlement] . . ., deference should also be given to
the Trustee’s judgment regarding the settlement, Hill v. Burdick (In re
Moorhead Corp.), 208 B.R. 87 (1st Cir.BAP1997), provided that the trustee
can demonstrate that the proposed compromise falls within a ‘range of
reasonableness.’” Fibercore, Inc., 391 B.R. at 655 (citing In re Whispering
Pines Estates, Inc., 370 B.R. 452, 461 (1st Cir.BAP2007), and In re 110 Beaver
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St. P'ship, 244 B.R. 185, 187 (Bankr.D.Mass.2000)).
As the First Circuit stated in Healthco, the factors set forth by the court in
Jeffrey v. Desmond, are not exclusive. 136 F.3d at 50. In In re Telcar Group,
Inc., 363 B.R. 345 (Bankr.E.D.N.Y.2007), the court added public policy as a
factor to consider, stating that it was “obliged to consider the public policy
implications of the settlement, whether or not the issue is raised at all, much
less by a non-party.” Id. at 353.
High Voltage Eng’g Corp., 397 B.R. at 601-602.
Applying that standard to the Trustee’s Motion to Approve Settlement compels the
conclusion that the Trustee properly exercised her business judgment in reaching the
settlement which is fair and reasonable. The Trustee evaluated the merits of the PBGC’s
various claims, achieved a sizable reduction in the amount of its priority claims, and
avoided protracted and complex litigation with respect to the merits of the claims.
Crawford admitted that the Trustee engaged her accountant to assist her in evaluating the
claims. Moreover, “[t]he method used by the PBGC in determining the amount of
unfunded benefit liabilities is complicated.” Dugan v. PBGC (In re Rhodes, Inc.), 382 B.R.
550, 554 (Bankr. N.D. Ga. 2008). Litigating the amount of the PBGC claims would be a
lengthy and costly undertaking as evidenced by the discussion of expert testimony by the
court in In re U.S.Airways Group, Inc., 303 B.R. 784, 789-91 (Bankr. E.D. Va. 2003).
Accordingly, the Trustee’s business judgment in seeking settlement over protracted,
complex, and costly litigation is entitled to deference. This is particularly so in view of the
competing public policies under ERISA and the Bankruptcy Code, namely the protection
of employee benefits and the fair and equitable treatment of creditors’ claims, respectively.
While Crawford raises a number of worthwhile points and should be commended
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for scrutinizing the reasonableness of the settlement, the Court finds that the Trustee and
the PBGC ably addressed and rebutted the points made in his Objection, in particular his
assertion that the gender allocation increased the amount of the ULB claim. With reference
to Crawford’s focus on the applicable discount rate, the Court concludes that, although two
circuit court of appeals decisions, In re CF & I Fabricators of Utah, Inc., 150 F.3d 1293 (10th
Cir.1998), cert. denied, 526 U.S. 1145 (1999), and In re CSC Indus., Inc., 232 F.3d 505 (6th
Cir.2000), cert. denied, 534 U.S. 819 (2001), have rejected application of the PBGC regulation
in favor of a so-called “prudent investor” discount rate, this Court, see In re High Voltage
Eng’g Corp., No. 05-10787, Slip Op. at (Bankr. D. Mass. July 26, 2006), and others, see In re
Kaiser Aluminum Corp., 339 B.R. 91, 96 (D. Del. 2006), Dugan v. PBGC (In re Rhodes, Inc.),
382B.R. 550 (Bankr. N.D. Ga. 2008), In re U.S. Airways Group, Inc., 303 B.R. 784 (Bankr.
E.D. Va. 2003), In re UAL Corp., No. 02 B 48191 (Bankr. N.D. Ill. Dec. 30, 2005), have
determined that the Supreme Court’s decision in Raleigh v. Illinois Dep’t of Revenue, 530
U.S. 15 (2000), requires the bankruptcy court to determine that a creditor’s claim “‘in the
first instance’ is a function of the nonbankruptcy law giving rise to the claim.” U.S. Airways
Group, Inc., 303 B.R. at 792. Thus, the Trustee decision to adopt the emerging line of cases
was reasonable in the absence of decisions from the United States Court of Appeals for the
First Circuit, especially where this Court previously has ruled on the issue.
Finally, Crawford’s argument that the PBGC should be precluded from recovering
more than what it set forth in its proofs of claim is readily resolved. In the first place, the
PBGC filed amended claims on February 12, 2009. Secondly, in its original proofs of claim,
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it stated that its investigation was continuing and that it reserved its right to “amend,
modify and supplement this proof of claim and/or to file additional proofs of claim.”
Accordingly, due process does not preclude allowance of the Trustee’s Motion to Approve
Settlement Agreement.
Crawford’s remaining arguments, particularly those in which he suggests that the
Trustee was strong-armed into accepting a settlement with the PBGC are speculative and
without evidentiary support. The Chapter 7 Trustee in this case is an experienced
bankruptcy attorney known for competence and integrity. While this Court has considered
Crawford’s factual and legal arguments, it unequivocally rejects those that intimate that
the Trustee has failed to perform her duties under 11 U.S.C. § 704 as wholly unmeritorious.
IV. CONCLUSION
In view of the foregoing, the Court finds that the Trustee satisfied her burden under
In re Healthco Int’l, Inc. and Jeffrey v. Desmond. Accordingly, the Court shall enter an
order granting the Trustee’s Motion to Approve Settlement Agreement.
By the Court,
Joan N. Feeney
United States Bankruptcy Court
Dated: May 5, 2009
cc: Lynne F. Riley, Esq., Brad Rogers, Esq., Peter A. Crawford
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