Recently, the U.S. Bankruptcy Court for the District of Delaware had the opportunity to further clarify the power of § 363 sale processes to cleanse assets and the fragile nature of pension claims in bankruptcy. The court considered and rejected an objection to a § 363 sale free and clear of any successor liability claim where the sale was supported by the debtors, the lenders and the unsecured creditors’ committee, but not the pension trust.
On Feb. 25, 2013, Ormet and certain affiliated debtors, major producers of aluminum and owners of an alumina refinery in Burnside, La., and an aluminum smelter in Hannibal, Ohio, each filed voluntary chapter 11 petitions in the U.S. Bankruptcy Court for the District of Delaware. The debtors employed more than 1,100 employees, the vast majority of which were represented by the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers Union.
Prior to the filing of the bankruptcy case, the debtors had engaged an investment banker and conducted a full marketing process to sell all of their assets as a going concern. After the filing, the debtors continued their sales efforts, obtaining approval of bid procedures and a stalking-horse bidder, Smelter Acquisition, LLC. When no other bids were received, an order was entered on June 10, 2013, approving the sale of substantially all the debtors’ assets to Smelter. There was a condition precedent to closing on the sale to Smelter, however: The debtors must obtain relief from the Public Utilities Commission of Ohio (PUCO) modifying the terms of their contract for the purchase of electricity from Ohio Power Company and Columbus Southern Power Company (AEP-Ohio).
On July 11, 2013, PUCO denied the immediate emergency relief requested by the debtors and scheduled further proceedings to consider the ultimate relief requested, but although PUCO provided some relief to the debtors, it was not enough to allow the operations to continue. Following the PUCO rulings, the sale to Smelter did not close, the lender declared a default under the debtor-in-possession financing, and the debtors ceased all production of aluminum in Hannibal on Oct. 7, 2013, but kept the Burnside facility on “hot idle” status to permit it to be sold as a going concern.
On Oct. 26, 2013, the debtors filed a motion to sell the Burnside refinery to Almatis, Inc. and as a result of that sale and the subsequent sale of their raw material inventory, the debtors were able to repay the debtor-in-possession financing in full, but not much more.
In June 2013, after a second difficult sale process, the debtors filed a motion to sell the Hannibal facility to CCP ORMT Acquisition, LLP (the stalking-horse bidder) at a cash price of $15,250,000, followed by an auction resulting in a final cash bid of $25,250,000 by Niagara Worldwide LLC (the buyer). At the hearing to approve the sale to the buyer, the Steelworkers Pension Trust continued to press its objection that the sale could not take place free and clear of successor liability from its claims.
More specifically, the trust raised two important issues in its objection: first, whether the sale under § 363(f) could be free and clear of any successor-liability claim that the trust may have against the proposed purchaser, and second, whether the court should deny the debtor’s request for a waiver of the 14-day waiting period under Federal Rules of Bankruptcy Procedure 6004(h) and 6006(d), which would permit the parties to file an appeal and seek a further stay. The Trust was concerned that if the stay of the sale approval order was waived, the debtor and purchaser would immediately close the sale and eliminate any meaningful right of appeal that the Trust may have under the concept of equitable mootness.
The court first considered whether the Bankruptcy Code expressly permits it to enter an order under § 363(f) to sell the assets to a purchaser free and clear of the Trust’s asserted successor-liability claim for the underfunding of the pension. The court considered the Trust’s arguments that cases cited by the Trust under § 363 were distinguishable because they failed to consider successor liability for pension claims arising under the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001-1461, et seq. (ERISA) or the Multiemployer Pension Plan Amendments Act of 1980, 29 U.S.C. §§ 1381-1461 (MPPAA).
While recognizing the Trust’s concerns and public policy arguments, the court concluded that § 363(f) extinguished successor-liability claims. The court opined that making an exception to the provisions of § 363(f) for successor-liability claims would depress the prices that future parties would bid for a debtor’s assets. The court also noted the policy inherent in the Bankruptcy Code that its purpose is to maximize the value of the debtor’s assets for distribution to creditors in accordance with the priority scheme set forth in the Bankruptcy Code. Specifically, the court noted that a purchase price adjustment for the claims would have been difficult as the claim amounts were uncertain. In addition, the court concluded that the congressional policy favoring multi-employer pension plans expressed in ERISA and MPPAA does not trump the express provisions of the Bankruptcy Code permitting the sale of the Debtor’s assets free and clear of the Trust’s successor-liability claim.
Separately, the Trust argued against the court’s waiver of the stay of the sale order for 14 days to permit the Trust to appeal. The Trust feared that if the stay was waived, the parties would close immediately, thus mooting the appeal. Further, the Trust noted that the stay was not appropriate because the parties to the sale can change the closing date, and if the buyer does not close the sale, the debtors can sell to the back-up bidder.
The court was not persuaded to permit a stay of the sale order. The court noted that the debtors already had one failed asset sale early in their cases. Moreover, the court noted that the debtors were able to find additional bidders and hold an auction for the sale of these assets only after a second round of extensive marketing efforts. The court also noted that during this period, the debtors had defaulted on their debtor-in-possession financing obligations and, as a result, were required to lay off their entire workforce and idle their plants. Accordingly, the court found “ample” cause to waive the stay and allow the parties to close on the sale immediately.