Opinion
CV-N-02-0032-RLH (VPC)-BASE, CV-N-02-0083-RLH (RAM)
October 15, 2002
ORDER (Motion to Dismiss Appeal-#42)
This matter is before the Court on an appeal from an order confirming a Chapter 11 Debtor's plan of reorganization. Filed with the Court is Appellees' Washington Group International, Inc., et al. Motion to Dismiss Appeals of Consorcio DSD/Somor as Equitably Moot (#42, filed April 10, 2002). The Appellants' Opposition (#54) and Appellees' Reply (#57) are also considered.
For brevity, the Appellant will be referred to as "Consorcio," the Appellees as "Washington Group," and the entity which emerged after reorganization as "Reorganized Washington."
The parties should be advised that before considering the present motion to dismiss, the Court first read the appellate briefs and other documents (including the Appellant's Opening Brief, Appellee Plan Committee's Brief, Appellees Washington Group's Brief, the Memorandum of intervenor Raytheon Company and Raytheon Engineers and Constructors International, Inc. ("RECI"), and Appellants' Reply Brief) to ensure proper equitable considerations were addressed in the consideration of this motion.
It is the decision of the Court that the motion to dismiss be granted and the opinion of the Court that the appeal lacks merit.
The Washington Group is one of the largest construction/engineering/design companies (or amalgamation of companies) in the world. It employs approximately 35,000 people and performs massive projects for industry and governments throughout the world, which require substantial financing by project owners spanning years. In July 2000, it made what turned out to be an unfortunate acquisition of Raytheon Engineering and Constructors International ("RECI"), a subsidiary of Raytheon Corporation, with many ongoing projects worldwide. Cost overruns, and issues of disclosure and fraud, together with claims of price and payment adjustments quickly dominated the Washington Group-RECI marriage, and litigation was instituted with the claims on each side reaching figures approaching $900,000,000. The result was to force the Washington Group into a Chapter 11 effort for reorganization.
Because the value of a construction/engineering/design business lies in its ability to maintain ongoing projects and continue to compete for and obtain new contracts and financing, there is a need to emerge quickly from any attempted reorganization or literally die trying. Negotiations among the Washington Group, its lenders (the secured creditors), who became known as Class 6 creditors, Raytheon, and the unsecured creditors (eventually represented by the Plan Committee) who became known as Class 7 creditors, began even before the filing of the petition in bankruptcy, but without success in agreeing on a pre-petition plan of reorganization. The eventual modified plan confirmed by the Bankruptcy Court was the product of negotiations among the Washington Group, the Lenders' Steering Committee, and the (unsecured) Creditors' Committee, and included the net-zero settlement of the Raytheon litigation.
On the day of filing, May 14, 2001, a Plan of Reorganization was submitted, which was opposed by nearly everyone, together with a request to pay critical vendors, which was granted, to ensure that ongoing projects would not be interrupted. There immediately arose several major areas of dispute: the amount, validity, and priority of the lenders' (secured creditors') claims; the valuation of the company vis a vis the amount of the secured claims; the amount of the unsecured creditors' claims, and the value or liability presented by the Raytheon litigation. Intense negotiations, as well as discovery, were undertaken in earnest. Various modifications and amendments to the Plan were submitted, opposed, renegotiated, modified once again and resubmitted over a period of several months. Valuation experts presented opinions of value between $550 million and $1.2 billion, differing among them by hundreds of thousands of dollars.
The initial plan provided that Class 6 would get all the stock equity in the Reorganized Washington and Class 7 would get a pro rata distribution of any judgment against Raytheon. There were serious objections, particularly by Class 7.
A Second Amended Plan was filed August 2, 2001, but it, too, was opposed by Class 7 (unsecured creditors) and voted down by them.
The First Modified Plan (submitted in August 2001) changed the new stock equity distribution of 93% to Class 6 and 7% to Class 7, with a 30%-70% split, respectively, of the recovery by the litigation trust, (into which the Washington Group had deposited $20 million to finance the litigation), with additional warrants to Class 7. In this First Modified Plan, deficiency claims of Class 6 ( i.e., amounts of the secured claims that exceeded the value of the estate) would share with the Class 7 distribution. With significant opposition still present, no confirmation was obtained, and the parties returned to their negotiation efforts.
Thc Second Modified Plan (submitted in October 2001) provided for essentially the same distribution, but the lenders (Class 6) waived any distribution on account of lender deficiency claims in Class 7 distributions.
An October 2001 hearing was conducted which ultimately denied certain equity rights to Dennis Washington, the primary stockholder of the Washington Group, but which is of no import to the issues presented here.
The final plan was the Third Modified Plan which was the fruit of a "global" settlement produced by intense negotiations during the adjournment. This settlement resolved disputes over valuation and the validity and scope of the liens, based upon an agreed valuation near low midpoint of the various evaluations experts' figures, i.e., at between $700 million and $778 million. The lenders' secured claims were in the neighborhood of $572 million. With the valuation of between $700-778 Million, and secured claims of $572 million, there would be no deficiency, paving the way for increased distribution of equity to unsecured creditors.
The final (Third Modified Plan) provided that the Lenders (secured creditors) would receive 80% of the Reorganized Washington stock equity plus a distribution of $20 million in cash, made possible by the settlement of the Raytheon litigation, thus freeing the $20 million which had been deposited in the litigation trust to finance the litigation. The unsecured creditors would receive 20% of the equity of Reorganized Washington, plus some warrants (to reflect the net-zero settlement with Raytheon). The Lenders' claims were determined to be fully secured, based on the valuation range of $700-778 million, therefore there would be no deficiency claims. And, finally, the Raytheon litigation was settled with both sides waiving claims or distributions. This plan was apparently submitted on November 9, 2001, the Bankruptcy Judge approved the disclosure of the plan and scheduled the hearing to resume on November 19, 2001.
There was broad support for the Third Modified Plan. The election among the Lenders exceeded the Code majority requirements for confirmation. There was a cram down of the Plan as to unsecured creditors, pursuant to the Code. Only appellant here and a combine of secured creditors, continue to object.
Their claims constitute another appeal which is dealt with separately by the Court and does not involve any of the claims of error of this Appellant.
After lengthy hearings by Bankruptcy Judge Zive, the Plan was confirmed December 21, 2001, effective January 25, 2002. On January 17, 2002, the Raytheon settlement agreement was approved and adopted as part of the Plan.
Consorcio's appeal is based on a number of grounds, most of which have been abandoned. A submission (#67) was made June 28, 2002, which modifies the request for relief and withdraws certain parts of the original appeal. For example, it withdrew its appeal as to any claims of discriminatory treatment of Class 7 creditors; it withdrew its appeal claiming an unlawful transfer to Raytheon Company ("Raytheon") through the Confirmed Plan; it withdrew its appeal of the inclusion of the Raytheon Settlement of compromises of Washington Group's claims relating to the "Designated Projects" that were not subject to compromise; and it no longer requests that any provisions other than Section § 7 of the Raytheon Settlement be deleted from the Settlement or the Confirmed Plan.
It appears that the remaining "requests" of Consorcio are primarily twofold: it seeks removal of Section 8.7 of the Raytheon Settlement from the Settlement and the Plan, and equal treatment with those unsecured creditors designated "critical vendors," who were ordered to be paid on the first day, i.e., payment in full of Consorcio's claim as well.
Appellees seek dismissal on the basis of equitable mootness, arguing that Consorcia never sought (much less obtained) a stay of the implementation of the Plan and there has been substantial consummation of the Plan, which would be jeopardized if Consorcio's appeal were granted. Consorcio urges the Court to consider the merits of the appeal and not be short circuited by the motion to dismiss, arguing that its claim could be easily implemented without disrupting the implementation of the Confirmed Plan.
DISCUSSION
Appellant has never sought a stay of the implementation of the approved Plan, either in the Bankruptcy Court or this Court. Since the approval of the Plan, the Reorganized Washington has successfully emerged from the Chapter 11 proceedings and is a viable and profitable company. Considerable activity has taken place, the unraveling of which would jeopardize the Plan, the integrity of the reorganization process, and the rights of those creditors and third parties who have proceeded with implementation of the Plan. Furthermore, what Appellant seeks would violate the Plan, change and interfere with the rights of others, to their detriment, and cause benefits to flow to it in excess of those provided for other creditors of the same class.
There is well established and wise precedent for dismissing an appeal where the appellant has failed to seek a stay and there has been substantial change of circumstances, such as substantial consummation of the provisions of a reorganization plan. In re Roberts Farms, Inc., 652 F.2d 793 (9th Cir, 1981). In Roberts Farms, the Circuit Court, on an appeal from an approved plan in Bankruptcy Court, condemned the appellants for "procedural ineptitude" when they failed to seek a stay and the plan had been-substantially carried out. Id. at 795. More specifically, the Court said, "In the field of the administration of estates under the bankruptcy laws, the policy of the law strongly supports a requirement that a stay be obtained if review on appeal is not to be foreclosed because of mootness." Id. at 796.
The foregoing policy was memorialized in a 1976 amendment to Bankruptcy Rule 805 by the addition of this last sentence:
Unless an order approving a sale of property or issuance of a certificate of indebtedness is stayed pending appeal, the sale to a good faith purchaser or the issuance of a certificate to a good faith holder shall not be affected by the reversal or modification of such order on appeal, whether or not the purchase or holder knows of the pendency of the appeal.
Explaining the purpose for the policy, the Roberts Farms Court, explained that, reversal of the order confirming the plan of arrangement, which would knock the props out from under the authorization for every transaction that has taken place, would do nothing other than create an unmanageable, uncontrollable situation for the Bankruptcy Court. Id. at 797.
Faced with a situation similar to what we have here, the Ninth Circuit also explained its decision thus:
An entirely separate and independent ground for dismissal has also been established because Appellants have failed and neglected diligently to pursue their available remedies to obtain a stay of the objectionable orders of the Bankruptcy Court and have permitted such a comprehensive change of circumstances to occur as to render it inequitable for this court to consider the merits of the appeal.
* * *
Admittedly, the principle of dismissal of an appeal for lack of equity applied in this case places a heavy burden on aggrieved party-appellants in bankruptcy cases. It is justified to prevent frustration of orderly administration of estates under various provisions of the Bankruptcy Act.
The foregoing principle of law has been reiterated in two subsequent decisions, even though in those decisions the Circuit Court found that in each of those cases there was insufficient "culmination" to require a finding of mootness. In In re Baker Drake, Inc., 33 F.3d 1348 (9th Cir. 1994), the district court had decided that the Bankruptcy Code did not preempt the Nevada Administrative Code regulation that requires drivers for taxicab companies be employees of the companies rather than independent contractors. On appeal from the district court's decision, the Public Services Commission did not seek a stay of the bankruptcy court's injunction. The Circuit Court found there was not a substantial change of circumstances because the potentially affected cabdrivers had leased, and not purchased, automobiles in anticipation of the Bankruptcy Court's decision. But the Court reiterated the general rule as follows:
The classic example of mootness in the bankruptcy context is a case in which the debtor has failed to seek a stay of foreclosure and the debtor's property has been sold. The transfer to a third party pre-cludes meaningful relief. See In re Onouli-Kona Land Co., 846 F.2d 1140 (9h Cir. 1988).
We also dismiss an appeal as moot if a party opposing a reorganization plan has failed to obtain a stay pending appeal, and the plan has been carried out to "substantial culmination." In re Roberts Farms, Inc., 652 F.2d 793 (9th Cir. 1981); see In re Public Serv. Co. of New Hampshire, 963 F.2d 469 (1st Cir.), cert. denied, 506 U.S. S.Ct. 304, 121 L.Ed.2d 226 (1992). In Roberts Farms, where the plan had "been so far implemented that it [was] impossible to fashion effective relief for all concerned," and where a disapproval of the plan at the appellate level "would do nothing other than create an unmanageable uncontrollable situation for the Bankruptcy Court," the appeal was dismissed as moot. Roberts Farms, 652 F.2d at 797.
In In re Arnold Baker Farms, 85 F.3d 1415 (9th Cir. 1996), the Court affirmed the denial of a motion to dismiss for mootness, because only a single transaction had been carried out and both parties to the transfer were parties to the appeal. However, it reiterated clearly the declarations of law, with references to Baker Drake and Roberts Farms, stating that, "a court can dismiss an appeal as moot `if a party opposing a reorganization plan has failed to obtain a stay pending appeal, and the plan has been carried out to "substantial [culmination,"'" Id. at 1419, and "The transfer to a third party precludes meaningful relief" Id.
Here, Appellant does not contest the failure to seek a stay. It makes a half-hearted argument that such an attempt would have been futile. However, even if such an attempt might prove futile, Appellant is obligated to make the effort. Then it might be justified in saying it made a good faith effort, and should not be penalized for the Bankruptcy Court's refusal to provide such relief. Furthermore, there is nothing to preclude it from seeking a stay before this Court in the course of its appeal. Yet, it has failed to even make any effort in that regard.
In addition, it makes no attempt to argue that substantial consummation (or culmination, if one prefers) has not occurred. Instead, it argues that what it seeks will not interfere with or disrupt the Plan or its implementation. While there may remain uncompleted transactions, a substantial portion of the Plan has been implemented, and what Appellant seeks will, in fact, interfere with and disrupt the implementation of the Plan.
There was no contradiction that in the implementation of or reliance upon the confirmed Plan, the following have occurred:
Reorganized Washington has distributed tens of millions of dollars to creditors pursuant to the Confirmed Plan.
Reorganized Washington has dismissed various actions against Raytheon, including one in Idaho state court and the adversary proceeding before the Bankruptcy Court.
Reorganized Washington has extinguished the debtor-in-possession financing facility (the "DIP") that enabled Washington Group to fund operations while in bankruptcy, and extinguished liens on the assets of Washington Group granted in connection with that financing.
Reorganized Washington has entered into a new financing facility providing for hundreds of millions of dollars in new working capital with a group of lenders — including some lenders who were not parties in the bankruptcy proceedings and did not participate in the DIP and who are not parties to this appeal — and granted new liens on assets of Reorganized Washington in connection with the new financing, and paid millions of dollars in nonrefundable fees associated with this financing.
Reorganized Washington has cancelled approximately fifty-two million shares of stock of the Company.
Reorganized Washington has issued 25 million shares of new stock in Reorganized Washington, of which more than 20 million shares have been distributed pursuant to the Confirmed Plan and which now is actively traded in public over-the-counter markets pending listing on a registered exchange.
Reorganized Washington has named a new board of directors for Reorganized Washington, with input from the creditor constituencies of Washington Group, as specified in the Confirmed Plan.
Reorganized Washington has paid taxes, settled litigation, and obtained new bonding facilities.
Reorganized Washington has fully entered the stream of commerce as Reorganized Washington based on the restructured balance sheet implemented via the Confirmed Plan, having bid for and won new work and project extensions, including projects with at least one foreign government and the United States Department of Energy (including a technical consultancy contract for the State Turkish Hydraulics Works in Turkey; an air force base upgrade for the United States Army Corps of Engineers; a teaming with International Uranium Corporation for relocation of the Moab, Utah uranium mill tailings; a $20 million plant at Southern Illinois University; leading a team of contractors supporting the stabilization and closure of the Department of Energy's Hanford site in western Washington state; a contract on an Unconventional Nuclear Weapons Defense project for the Defense Threat Reduction Agency, among others).
Accordingly, the two conditions for dismissal on equitable mootness grounds are met.
Consorcio's response is to dismiss the motion as another barrage of fundamentally inequitable arguments to distract the Court from reviewing the alleged violations of the Bankruptcy Code, and to then attempt to reargue what it considers to be its equitable position that relief can be granted without any disruption of significance. The Court would note that the operative word is "equitable." And the operative question is "equitable for whom?"
Consorcio argues that its claim, purportedly in the amount of $40 million, can just be paid, like unto those of the "critical vendors," without upsetting the carefully and painstakingly negotiated distribution of the estate's assets to other secured and unsecured creditors, without jeopardizing the implementation that has taken place (such as distribution of stock in Reorganized Washington, obtaining of financial commitments and contractual obligations). It further claims that the Court can unilaterally strike from a settlement agreement a provision that it "fears" could be used to argue against its interests.
Resurgence's Pollyanna view of the effect of its blithe proposal ignores some fundamental facts and rights of others. Furthermore, to follow its suggestion would violate the very Plan that was approved by the creditors and the Court, and has been implemented with reliance on its validity.
Some explanation of Consorcio's involvement and claim is in order. Consorcio is not a direct creditor of the Washington Group. In 1997, a joint venture among five corporations created POSVEN, C.A., a corporation domiciled in Venezuela ("Posven"). Posven entered into a contract with, among others, Energy Overseas Internation, Inc.("EOI"). to own and operate a facility to be built for the production and sale of hot briquetted iron. EOI was a Raytheon entity and Posven agreed to be one of its subcontractors, but railed to obtain a guaranty or bond from Raytheon. EOI was one of the entities potentially involved in the Washington Group-Raytheon purchase. The Posven Project was conceded to be a financial disaster. When Raytheon and Washington Group entered into the Stock Purchase Agreement in April 2000, Washington Group's acquisition of EOI excluded the Posven Project and three other problem projects. Consorcio has pursued its claim against Raytheon in what has been often referred to as the London Arbitration, but it also continues to make a claim against the Debtors here through EOI. It apparently has had some success in the London Arbitration, which prompted it to withdraw many of the issues on appeal from this Court. However, it has objected to the fact of the Settlement Agreement between the Washington Group and Raytheon, apparently fearful that it would jeopardize its claim against Raytheon, or its right to recover from the bankruptcy estate. The critical point of this concern is the language of Section 8.7 of the Settlement Agreement. More specifically, it is concerned with the words, "or otherwise," fearing they might be used by Raytheon as a defense against Consorcio's claims in the London Arbitration.
Section 8.7 reads as follows:
Status and Effect of Stock Purchase Agreement, Etc. Upon the Effective Date of the Plan, the rejected Stock Purchase Agreement, the rejected Receivables Termination Agreement and the rejected Project Completion Agreements entered into pursuant to the Stock Purchase Agreement, shall thereupon be terminated and have no further force or effect, right or obligation, among the parties thereto or otherwise. All matters arising therefrom as among the parties thereto, including but not limited to. the Raytheon Claims, the Raytheon Asserted Clams, and the Debtors fraudulent transfer adversary action referred to herein, and any obligations, entitlements, benefits or burdens thereunder, shall be governed, superseded, or replaced as the case may be, by this Agreement, the Plan, and the Raytheon Settlement Provisions and Documents.
Consorcio raised this concern at the hearing on confirmation of the Plan, and the Court specifically ruled and ordered that no party, particularly the parties to the Settlement Plan, could use Section 8.7, or the language contained therein, as a defense against any claims by Consorcio. Furthermore, all the relevant parties assured the Bankruptcy Court and Consorcio that they understood and promised not to raise the Settlement Agreement as a defense against Consorcio's claims. Notwithstanding, Consorcio continues to express concern that they will not abide by the Bankruptcy Court's order, modifying or clarifying the Plan, or the promises made on the record.
As noted by counsel for the Appellee Plan Committee (of the unsecured creditors), "It is [indeed] a harsh world in which the Appellant lives, populated by ruthless debtors, faithless creditors' committees and feckless bankruptcy judges." Appellant's Opening Brief and its Opposition to the Motion to Dismiss contain and "strange amalgam of unsupported accusations, vituperative language and disingenuous expressions of shock." More words are used to attack the actions of the parties than used to argue error on the part of the Court. The record reflects that Consorcio made its objections to the Bankruptcy Court, and that the Bankruptcy Court heard and responded to the objections by specific rulings to ensure that Consorcio's rights and claims in the London Arbitration would not be adversely affected by either the Plan or the Settlement Agreement.
Consorcio complains that some of the "critical vendors" ordered paid on the first day could not have been that critical, including food deliveries, etc. It ignores the nature of the vast majority of the claims of the critical vendors, and only assumes that such mundane things as food delivery could not be critical to an ongoing project. It presumes the right to be considered as a critical vendor. It is an assumption and presumption without the benefit of any fact or authority.
Consorcio's "modest proposal" would put it in a position of advantage over members of both the secured and unsecured creditor classes. It would establish rights not possessed by, and in excess of, the other unsecured creditors not classified among the critical vendors. It would necessarily and significantly draw from the financial resources of Reorganized Washington, jeopardizing sources of financing, the value of the equity received by other creditors, and detract from the value of assets already used for financing. Consorcio has failed to establish any arguable basis for giving it such an advantage and further fails to establish that its proposal is either effective or equitable.
Lastly. contrary to Consorcio's assertions, the Court cannot unilaterally change portions of agreements of third parties, nor can it remove a portion of a settlement agreement which has been adopted in a Confirmed Plan. That would require the rejection of the entire Settlement Agreement and a modification of the plan, involving the approval of the various classes of creditors and the Bankruptcy Court below. It would require an unwinding of the many actions undertaken in implementation of the Plan.
In seeking to establish this advantage over the other creditors, it becomes clear why Appellants did not request a stay. It appears to be an obviously calculated measure to ensure — without delay — its distribution under the terms of the Confirmed Plan, while leaving it free to seek even greater advantage and recovery without jeopardizing what it had already possessed under the Confirmed Plan.
Equity to all the other parties requites that this appeal be dismissed. No stay was sought, or even desired. There has been substantial consummation of the Confirmed Plan, which has not only involved tens of millions of dollars, but also involved parties not parties to the bankruptcy or this appeal. To acquiesce to Consorcio's appeal would require an unwinding of much that was done, modification of the Plan, and adversely affecting the rights of virtually everyone else involved. This Court cannot, and will not modify a Plan approved and confirmed after months of negotiations and after months of implementation, nor will it consider granting Appellant's request that it be treated as a critical vendor and given more than its class peers, at the expense of other unsecured creditors, the reorganization, and all those who have gone forward in reliance of the Confirmed Plan.
While this Court is dismissing the appeal for the reasons stated above, without making a decision on the merits of the appeal, it wishes the parties to understand that it studied the presented briefs and documents of the appeal to assure itself that in doing so it is not rendering an injustice. It is confident that it is not.
This Appellant argues on appeal, that there were violations of various Bankrupcy Code sections and Bankruptcy Rules. After reviewing the appeal documents — they are voluminous and it took several weeks — the Court is of the opinion that the Bankruptcy Judge, the Honorable Gregg W. Zive, went to great lengths to adhere to the rules and statutes governing this case, and to ensure that all the parties involved were treated fairly, at the same time managing the monumental task of ensuring that an enormous bankrupt estate, and the fortunes of the many creditors who had dealt with the debtor, came through the process successfully, with a maximization of the protection of rights and property. He should be commended, not vilified. Any errors that may have occurred, and this Court is not of the opinion that there were any, were minor and incidental, and, more important, harmless. Had this Court considered the appeal on its merits it would have undoubtedly affirmed the decision of the Bankruptcy Court below.
ACCORDINGLY, for good cause and more particularly for the reasons more fully described above, Appellees' Washington Group Intemational, Inc., et al. Motion to Dismiss Appeals of Consorcio DSD/Somor as Equitably Moot (#42) is GRANTED and the appeal is dismissed.
JUDGMENT IN A CIVIL CASE
___ Jury Verdict. This action came before the Court for a trial by jury. The issues have been tried and the jury has rendered its verdict.
___ Decision by Courts. This action came to trial or hearing before the Court. The issues have been tried or heard and a decision has been rendered.
XX Decision by Court. This action came to be considered before the Court. The issues have been considered and a decision has been rendered.
IT IS ORDERED AND ADJUDGED that Appellees' Washington Group international Inc., et. al. Motion to Dismiss appeals of Consorcio DSD/Somor as Equitably Moot is granted and the appeal is dismissed