Opinion
05-08-2014
In re: Superior National Insurance Gr Debtor(s). 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).
CHAPTER 11
MEMORANDUM OF OPINION GRANTING IN
PART AND DENYING IN PART
DEFENDANTS' MOTION TO DISMISS
AMENDED COMPLAINT
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 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 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 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 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).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).
"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.
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.
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."
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 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 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.
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.
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.
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.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 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 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 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 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.
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. 9 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).
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 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 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. 1 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).
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,The motion is otherwise denied.
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 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. ###
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Geraldine Mund
United States Bankruptcy Judge