Jointly Administered Under Case No. BK-N-01-31627-GWZ, Chapter 11United States Bankruptcy Court, D. Nevada
November 16, 2001
Patrick A. Murphy, Attorneys for Official Unsecured Creditors’ Committee, MURPHY SHENEMAN JUHAN ROGERS.
Timothy R. Pohl, Jennifer A. Smith, Counsel to Debtors, SKADDEN, ARPS, SLATE, MEAGHER FLOM and LIONEL SAWYER COLLINS.
Julia Frost-Davies, David C. McElhinney, Counsel to Raytheon Entities, BINGHAM DANA LLP and BECKLEY SINGLETON.
Stephen R. Harris, Marcia L. Goldstein, Counsel to CS First Boston, BELDING, HARRIS PETRONI, LTD. and WELL, GOTSHAL MANGES LLP.
Jahet L. Chubb, Richard H. Epstein, Counsel to Mitsubishi Heavy Industries, Ltd., et al., JONES VARGAS and SILLS CUMMIS RADIN TISCHMAN EPSTEIN GROSS, P.A.
FINDINGS OF FACT AND CONCLUSIONS OF LAW REGARDING COMPLIANCE OF THE WASHINGTON AGREEMENT WITH 11 U.S.C. § 1129(b)(2)(B)(ii)
GREGG ZIVE, United States District Judge
On October 10, 2001, the confirmation hearing with respect to the Debtors Second Amended Plan, as Modified (the “Plan”) commenced before this Court in the above captioned cases. The issue heard on October 10-12, 2001, was whether or not the agreement of the Debtors with Dennis Washington, as set forth in Section 5.15 of the Debtors’ Plan (the “Washington Agreement”), violates 11 U.S.C. § 1129(b)(2)(B)(ii) of the Bankruptcy Code, which codifies the Absolute Priority Rule. This matter originally came before this Court pursuant to a Motion for Order Terminating the Exclusive Right of the Debtors to File and Seek Termination of a Plan of Reorganization filed by the Official Unsecured Creditors’ Committee (the “Committee”), which Motion was based, in part, on the Washington Agreement. The Debtors responded by modifying the Plan to provide that, in the event this Court determined that the Washington Agreement violated the Absolute Priority Rule, the Washington Agreement would automatically be deleted from the Plan. In light of that modification this Court deferred consideration of the effect of the Washington Agreement to the confirmation hearing as the first matter to be heard. After receiving testimony and evidence submitted by the parties, hearing the arguments of counsel, and weighing all the admitted evidence, the Court makes the following findings of fact and conclusions of law:
I. Findings of Fact
1. The Washington Agreement proposes to name Dennis Washington Chairman of the Board of Reorganized WGI upon the Effective Date and to grant him significant financial consideration consisting of options to purchase common stock issued by Reorganized WGI.
2. Pursuant to the Washington Agreement, Dennis Washington would receive no other compensation and would not be required to work full time.
3. The options to purchase common stock issued by Reorganized WGI to be granted to Dennis Washington under the Washington Agreement have significant value.
4. The only quantifiable measurement for conditions to the vesting of Dennis Washington’s right to exercise the stock options granted under the Washington Agreement is the passage of time.
5. No evidence has been presented to the Court regarding (a) the contributions of the chairman of the board of directors of a company like WGI, (b) what a chairman of the board is paid, (c) what options or incentive plans are provided to them, and (d) the type of evaluation which would occur to fill such a critical position.
6. The opportunity offered to Dennis Washington was exclusive under the circumstances.
7. The opportunity offered to Dennis Washington was on account of his existing ownership of stock in the Debtors.
8. To the extent that any of the foregoing findings of fact constitute conclusions of law they shall be deemed to be conclusions of law.
II. Conclusions of Law
1. The Supreme Court rejected an absolute interpretation of the New Value Corollary and the Absolute Priority Rule in Bank of America NT SAv. 203 North LaSalle St. Partnership, 526 U.S. 434 (1999).
2. Accordingly, whether an opportunity to purchase or retain an interest in a reorganized debtor given to existing equity where a class of unsecured claims objects is on account of an existing interest is in violation of the Absolute Priority Rule must be considered on a case by case basis under 203 North LaSalle based upon the evidence presented in a particular case.
3. The burden of proof is upon the plan proponent to establish that the plan complies with all of the relevant provisions of 11 U.S.C. § 1129(a) and (b).
4. There is a presumption that must be met when a shareholder obtains an equity participation of the reorganized debtor and unsecured creditors remain unpaid. Liberty Nat’l Enterprises v. Ambanc La Mesa Ltd.Partnership (In re Ambanc La Mesa Ltd. Partnership), 115 F.3d 650, 656
(9th Cir. 1997); Northern Pacific Rwy v. Boyd, 228 U.S. 482 (1913). Under the facts of these cases, at the very least the burden of persuasion rests upon the Debtors to establish that the Washington Agreement does not violate 11 U.S.C. § 1129(b)(2)(B)(ii).
5. Under 203 LaSalle, the exclusive opportunity to purchase an interest in a reorganized debtor must be considered property as that term is used in 11 U.S.C. § 1129(b)(2)(B)(ii).
6. The exclusive opportunity afforded to Dennis Washington under the Washington Agreement was on account of his prior equity interest in the Debtors.
7. The exclusive opportunity afforded to Dennis Washington under the Washington Agreement on account of his prior equity interest in the Debtors violates the Absolute Priority Rule as codified in 11 U.S.C. § 1129(b)(2)(B)(ii).
8. The Court concludes that the Washington Agreement as incorporated in Section 5.15 of the Debtors’ Second Amended Joint Plan of Reorganization does not comply with 11 U.S.C. § 1129(b)(2)(B)(ii).
9. To the extent any of the foregoing conclusions of law constitute findings of fact they shall be deemed to be deemed to be findings of fact.