Case No. 99-92144-BHL-11United States Bankruptcy Court, S.D. Indiana, New Albany Division
July 10, 2000
ORDER
BASIL H. LORCH, III, Judge.
This matter came before the Court for an evidentiary hearing on June 26, 27 and 28, 2000, on the Motion to Estimate, Liquidate and Allow Satellite Claims Under 11 U.S.C. § 502(c) filed by the Unsecured Creditors Committee. The Court heard testimony of witnesses and argument of counsel, and being otherwise fully and sufficiently advised, finds that the claims of the Class 8 creditors are appropriate for estimation pursuant to 11 U.S.C. § 502(c).
The Court further finds that the claims of the Class 8 creditors should be, and accordingly are, valued at $3,000.00, for purposes of both voting and distribution. That amount is subject to the claim being a valid satellite-related claim. It represents a combination of cash and debt forgiveness. The claim will be allowed in an amount greater than $3,000, for purposes of distribution only, if the debt forgiveness exceeds $3,000. This amount assumes the continued offering by the Debtor of additional tax protection, credit repair, and mediation to all such claimants as provided in the proposed treatment of the Class 8 claimants.
IT IS SO ORDERED this 10th day of July, 2000, at New Albany, Indiana.
MEMORANDUM
This matter came before the Court on the Motion to Estimate, Liquidate and Allow Satellite Claims Under 11 U.S.C. § 502(c) filed by the Unsecured Creditors Committee on or about April 21, 2000. The Debtor’s Response to Motion to Estimate, Liquidate and Allow Satellite Claims Under 11 U.S.C. § 502(c) filed by the Unsecured Creditors Committee was filed on May 11, 2000. The Debtor, A.G. Financial Service Center, Inc., f/k/a American General Financial Center [“AG”], along with its parent, American General Finance, Inc. [“AGFI”], asserts that estimation is not necessary to avoid undue delay. The Court will address the propriety of estimation in the first instance.
Section 502(c) Analysis
In the wake of a $168 million judgment entered against it in a Mississippi state court action [the “Smith judgment”] and in light of public sentiment regarding fraudulent consumer sales practices, the Debtor filed for protection under Chapter 11 of the United States Bankruptcy Code on August 19, 1999, to liquidate its approximately 240,000 satellite claims.
Of those creditors, only 2.3% of the potential claimants filed a claim in the bankruptcy case. The Unsecured Creditors Committee represents the interests of those 5,600-plus satellite customers who filed claims against the Debtor related to their satellite systems.
While those individual claimants have unique complaints against the Debtor, and the claimed damages vary from over a million dollars to zero, the underlying fact pattern is substantially similar. The essence of the complaints against the Debtor generally focus upon fraudulent misstatements or inducements in the financing of satellite receivers. The Creditors Committee contends that the claims are capable of estimation. The Debtor, on the other hand, asserts that the fact patterns are too dissimilar for blanket estimation. This position, however, is undermined by the several “group settlements” that the Debtor has made with similar claimants.
The greatest distinction between the Class 8 claimants and the various claimants who have reached settlements with the Debtor (and have been placed in separate classes in the Debtor’s Plan of Reorganization) is their progress in pursuing their claims, not the underlying merit thereof. Those parties who have reached settlements with the Debtor were all well represented by counsel and had either obtained a large monetary judgment against the Debtor or were in a position to. Although the Court concedes that those claims were screened by counsel and may be more compelling factually, it would be naive to think that none of the Class 8 claimants hold substantially identical claims. Because the creditors who came forward and filed claims constitute less than 3% of the Debtor’s total customer base, it is logical to infer that these claimants represent the most aggrieved customers and thus bear the closest resemblance to those with whom the Debtor has previously settled claims.
Defenses exist in law to many of these claims, including the ones plaintiffs have prevailed on at trial. The Court, in estimating these claims, has considered the legal sufficiency of the claims, the reality of the “value” attached to these claims outside of bankruptcy, and the necessity of similar treatment for similar claims within the context of a Chapter 11 plan. By definition, “contingent claims” are not merely “unliquidated.” In order to estimate the appropriate value, the Court must make reasonable projections as to the likelihood of which contingency will occur. These projections should be made in consideration of the substantive law as well as the underlying purposes of section 502 (to prevent undue delay in the administration of a Chapter 11 case and to fairly apportion the Debtor’s assets).
The Debtor’s Second Amended Plan of Reorganization identifies the following options for Class 8 unsecured creditors:
(A) to agree to receive the treatment of his or her Claims consisting of (collectively, the “Debt Forgiveness Option”):
• forgiveness of his or her Credit Card Debt and
• $500 if the Claimant’s Credit Card Debt is less than $2,000 or $100 if the Claimant’s Credit Card Debt is $2,000 or greater; and
• Tax Liability Payments as described in Section 5.3(h)(3); and
• notification of certain credit reporting agencies to remove references to the Credit Card Debt from their databases;
or, alternatively
(B) to elect treatment under the Claims Resolution Process provided for in Section 5.4 (the “CRP Option”).
The disparity in bargaining power puts the Class 8 claimants at a sharp disadvantage in the claims resolution process [“CRP”]. A random sampling of the Class 8 claims indicate that many of the claimants are poorly educated or essentially illiterate. Because they have not, in most instances, privately consulted with counsel, they may not understand the nature of their claim against the Debtor. The Creditors Committee, therefore, argues that estimation of claims is the Class 8 creditors’ best recourse to obtain a fair valuation of their claims. The Committee asserts that the Debtor has significantly undervalued the Class 8 claims and that the CRP Option would procedurally disadvantage these 5600 claimants and unduly delay administration of the estate.
Section 502 (c) provides that any contingent or unliquidated claim shall be estimated for purpose of allowance when the fixing or liquidation of which would unduly delay the administration of the case. Although delay must be “undue” to invoke the mandatory estimation process under the foregoing section, that term is not a quantifiable variable.
The Class 8 claimants are spread across the United States. The merits of each individual case would have to be assessed according to applicable state or federal law by several persons in the course of the resolution process. The Court would be asked to resolve unsettled matters which would necessitate a similar analysis. Individual assessment of thousands of claims would be protracted and difficult by virtue of numerosity alone.
Furthermore, because the population of creditors is significantly less sophisticated than the Debtor and would likely proceed without assistance of counsel, the Court is not convinced that CRP, without a base estimation by the Court, would produce an acceptable result. Despite the shortcomings of a mass estimation, it is a useful tool in the efficient and equitable administration of the estate. Under the particular facts of this case, estimation coupled with a claims resolution process provides a superior mechanism for the valuation of the Class 8 claims.
Valuation Methodology
Having concluded that estimation is appropriate under section 502(c), the Court must calculate a reasonable base value for the Class 8 claims. It has been held that a court should use whatever method is best suited to the particular circumstances. Bittner v. Borne Chem. Co., 691 F.2d 134 (3d Cir. 1982); In re Seaman Furniture Co. of Union Square, Inc., 160 B.R. 40 (S.D.N Y 1993). The Creditors Committee initially sought to introduce evidence of settlements made with similarly situated creditors in order to prove the value of the claims.
The Debtor’s parent, AGFI, sought to exclude evidence of the settlements under Rule 408 of the Federal Rules of Evidence. The Court, however, in partially denying AGFI’s Motion in Limine, found that the post-petition settlements between the Debtor and other classes of claimants should be considered in that similarly-situated parties were entitled to similar treatment under Debtor’s Second Amended Plan of Reorganization and those proposed settlements would require approval by the Court. AGFI then withdrew its opposition to the Court’s consideration of the pre-petition settlements.
At the estimation hearing, several experts testified regarding the merits of the various claims and the purported worth of those claims. Their opinions, all well considered and well explained, varied from $21,700 to $173. At the heart of the disagreement as to the proper valuation was the different question the experts were answering. While one was telling the Court what an average claim would be worth in Mississippi or Alabama, considering the legal environment in light of the Smith judgment, another was explaining the actual damages suffered by the claimants and the amount necessary to make a claimant whole if he prevailed on liability. Like the blind men feeling the elephant, the approach is all important.
The Court’s approach, however, must be made in light of the bankruptcy objectives of section 502(c) and with an awareness of all of the “parts” which make up a Class 8 claim. While cognizant of hornbook damages calculations and the legal shortcomings of the claimants’ position, the Court also knows that these claims have value in the legal system.
If a plaintiff raises sufficient equitable questions, for instance, the statute of limitations may not be a bar to judgment. Certainly, if the Class 8 claims had no value, the Debtor would not have gone to such expense to settle so many similar claims.
Although the Debtor may not have been the party who made the alleged fraudulent misstatements, the Debtor does have a significant risk of exposure under a vicarious liability theory. The Debtor’s inaction, by not taking preventative measures or reacting appropriately when problems with the distributors became apparent, may satisfy the second and third elements of the “Marsh test”[1] as a basis for vicarious liability. That “risk” has been quantified by the Debtor by means of the above-referenced settlements that the Debtor has negotiated with individual parties.
All the parties conceded that valuation was, in large part, contingent upon the forum in which the claim was being pursued. These claims are being valued by a bankruptcy court in light of the provisions and policies of the Bankruptcy Code. In this forum, equal treatment and fair distribution are paramount considerations. Pre-petition claims are routinely modified to accomplish these goals. For example, secured creditors’ claims are crammed down to the value of their collateral and taxing authorities are stayed from adding interest and penalties. This treatment prevents those creditors from having an unfair advantage and thus receiving an unfair distribution. The Court, in its present endeavor, is seeking a proper bankruptcy value for the Class 8 claimants.
Valuation of Class 8 Claims
In addition to providing non-cash benefits in the nature of tax protection payments and credit repair, the Court finds that the Class 8 claims should be valued at no less than $3,000. That amount is a cumulative figure, in cash and debt forgiveness, or debt forgiveness, whichever is higher (the amount would be capped at $3,000 unless the debt forgiveness exceeds that figure). Any claimant has the right to reject the estimated valuation in lieu of alternative dispute resolution. In arriving at this amount, the Court has considered the value of the non-cash benefits and the fact that other claimants have incurred attorney fees ranging from 30-50% of their recovery while the estate is paying the fees for the Class 8 claimants. The estimated claim amount is supported by the following:
1. The $3,000 figure approximates a rescission of the contract between the parties. Professor Marsh testified regarding a “been done wrong” mentality exemplified by the Smith judgment and other recent decisions. A classic response to “been done wrong” is “give em their money back.” The average purchase price of the satellite system was represented to be $3,085.00.
2. The Debtor has agreed to pay the Taylor Group “B” claimants $3000 in satisfaction of their claims against the Debtor. This settlement is set forth in the proposed treatment of the Class 6 claims under the Second Amended Plan of Reorganization. The Taylor Group B Settlement Claimants are being paid $3,000 per person by the Debtor which will be paid into their Chapter 13 plans, as each member of the Taylor Group B Settlement Claimants are in their own individual Chapter 13 proceedings. This is the group of creditors most closely resembling the Class 8 creditors. Because the Code mandates non-discriminatory treatment of similarly situated classes, the treatment of Class 6 and Class 7 hereinbelow is particularly probative.
3. The Debtor has agreed to pay the Byrd and Connor Claimants $3,000 per Claim, which is to be applied first to reduce or retire any Credit Card Debt which the Claimant may owe to the Debtor on the satellite system. The Byrd and Connor Claimants are also being paid $10,000 directly by AGFI as consideration for the dismissal of pre-petition suits against AGFI and other AG entities. This settlement is set forth in the proposed treatment of Class 7 of the Second Amended Plan of Reorganization. Because of the position of these claims in the legal system and AGFI’s assessment of its exposure, AGFI has exercised its discretion and paid this additional amount to settle these claims. The amount paid under the Plan by the Debtor, considering that the Byrd and Connor claimants incurred attorney fees and received no non-cash benefits, would be something less than $3,000.
4. Unlike the Debtor’s plan, this treatment would not benefit those who have not paid on their satellite accounts more than those who have. It is an effort to place all the creditors in a financial position similar to the one they were in before the transaction. Although the estimated claim amount does not equal the total payments many claimants have made, it takes into account the benefit derived by the use of the product.
5. Notwithstanding any statute of limitations arguments, rescission is a remedy recognized by the TILA statute and as a remedy for fraud. Thus, a sum approximating an “undoing” of the transaction is appropriate. While scholars and politicians may debate the propriety of punitive damages, such as those awarded in the Smith judgment, this Court’s valuation is designed to compensate rather than punish. The underlying goal of fair and equal distribution supports this approach, and the fact that this is a liquidating Chapter 11 plan and the Debtor is out of the satellite financing business makes deterrence irrelevant.
6. The Court’s Order leaves intact the claimants’ right to reject the valuation and pursue alternative claims resolution. As such, it serves to protect those who think their claims gcould be demonstrated to be significantly higher. Those claims could be evaluated on an individual basis in light of the individual merit of the claim and particular defenses available at law.
Valuation for Voting Purposes
The Unsecured Creditors Committee has also asked this Court to clarify the value of the Class 8 claimants as it relates to the plan voting procedure. Because the Court’s ruling could have a perceived gerrymandering effect on plan confirmation, the Debtor strenuously objects to valuing the Class 8 claims differently from their stated value on the respective proofs of claim. But because the said proofs of claim are generally incomplete and totally subjective, the Court is not convinced that their stated value accurately reflects the true claim. Approximately 2,000 of the proofs of claim do not even contain a valuation and some are valued in the millions. To allow a few claims, because of their generous self-appraised value, to control the “two-thirds in amount” approval requirement of § 1126(d) would undercut the objectives of section 502 and ignore the similarities of the claims.
Section 502(c) expressly states that estimation is “for purpose of allowance under this section” and thus should result in an allowed claim for all purposes in the bankruptcy case. See, 4 Collier on Bankruptcy, Para. 502.04[3], p. 502-53. There is no basis for limiting estimation so as to establish a base value for purposes of distribution but not for purposes of voting.
For all of the foregoing reasons, the Court finds that the value of the Class 8 claims is $3,000, for purposes of both voting and distribution. That amount represents a combination of cash and debt forgiveness, or debt forgiveness, whichever is higher. A claim will be allowed, for distribution purposes, for over $3,000 only if it is entirely debt forgiveness. This amount assumes the continued offering by the Debtor of additional tax protection, credit repair, and mediation to all such claimants, as provided in the proposed treatment of the Class 8 claimants.
IT IS SO ORDERED this 10th day of July, 2000, at New Albany, Indiana.