In Re Abengoa Bioenergy Biomass Of Kansas, Llc.

Facts

IN RE ABENGOA BIOENERGY BIOMASS OF KANSAS, LLC.

2018 WL 812941 (2018)

NATURE OF THE CASE: The liquidating trustee, Kozel (P), moved to strike the objections to claims by the Missouri Liquidating Trustee (MLT) (Drivetrain). 

FACTS: A Spanish global conglomerate, Abengoa, S.A., and its American affiliates, financed in part, by a Spanish government entity, Cofides, S.A., received a $95 million dollars United States government grant and a $45 million loan guaranty by the United States Department of Energy (DOE). to Abengoa's subsidiary, Abengoa Bioenergy Biomass Kansas, L.L.C. (ABBK), debtor, to construct an experimental second-generation ethanol plant. After the expenditure of nearly $1 billion, the plant was completed. It never produced ethanol in commercial quantities. It didn't work. Several mechanic's lien creditors filed an involuntary chapter 7 petition against ABBK. ABBK converted the case to chapter 11. ABBK sold the plant for $48.5 million, settled and paid the mechanics liens of the vendors and contractors who built it, paid the United States about $3.4 million to settle the Government's claims and interests, and prepared to distribute the balance of the pot (roughly $20 million) to administrative claimants and the unsecured creditors who were not among the over 700 Abengoa affiliates. The plan provides for the payment of administrative and priority claims and a distribution of the remaining $20 million sale proceeds to non-affiliate unsecured creditors. The intercompany claims by Abengoa affiliates. would receive nothing. They were classified separately from the unsecured trade creditors. Four of the affiliates were chapter 11 debtors. Those entities are Abengoa Bioenergy Company, LLC (ABC), Abengoa Bioenergy Outsourcing, LLC (ABO), Abengoa Bioenergy Trading US, LLC (ABT), and Abengoa Bioenergy Engineering & Construction, LLC (ABEC). They filed claims of $69 million. They now demand their claims be treated on par with this ABBK's non-affiliated creditors, in part so that it can satisfy the Missouri Debtors' commitment to pay part of the proceeds to their Spanish government lender at the expense of ABBK's non-affiliated claimants. MLT asserted that the separate classification of the intercompany claims was improper and that its claims would have been paid pro rata in a chapter 7 action. As such the plan was not in their best interests under 11 U.S.C. § 1129(a)(7)(A)(ii). But ABBK’s executive vice president testified that ABBK and its affiliates were integrated entities, and the affiliates knew that ABBK was completely dependent on Abengoa and the affiliates for funding. They also knew that ABBK’s plant would not be profitable. None of the affiliates expected to be repaid. The executive vice president testified that the subordination and nonpayment of intercompany debts were part of the bioenergy group’s shared management strategy.

ISSUE: Does a plan meet the liquidation test of § 1129(a)(7), if the debtor does not separately classify intercompany claims with the intention of gerrymandering an impaired accepting class? Is a subordination agreement a valid reason for separate classification of claims? Does the best interests of creditors” or “chapter 7” test-found in § 1129(a)(7) require the plan proponent to show that a creditor that has not accepted the plan would receive no less under it than if the estate's assets were liquidated in a chapter 7 case?

RULE OF LAW: A plan meets the liquidation test of § 1129(a)(7) if the debtor does not separately classify intercompany claims with the intention of gerrymandering an impaired accepting class. A subordination agreement is a valid reason for a separate classification of claims. The best interests of creditors” or “chapter 7” test-found in § 1129(a)(7) requires the plan proponent to show that a creditor that has not accepted the plan would receive no less under it than if the estate's assets were liquidated in a chapter 7 case.

HOLDING AND DECISION: (Nugent, United States Bankruptcy Judge.) Does a plan meet the liquidation test of § 1129(a)(7), if the debtor does not separately classify intercompany claims with the intention of gerrymandering an impaired accepting class? Yes. Is a subordination agreement a valid reason for separate classification of claims? Yes. Does the best interests of creditors” or “chapter 7” test-found in § 1129(a)(7) require the plan proponent to show that a creditor that has not accepted the plan would receive no less under it than if the estate's assets were liquidated in a chapter 7 case? Yes. ABBK did not gerrymander classes to 'isolate' and disenfranchise the MLT claims. Section 1122(a) states: 'Except as provided in subsection (b) of this section, a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class.' Nothing in the bankruptcy code prohibits the separate classification of like claims into different classes so long as that is not done for the purpose of gerrymandering voting on the plan. ABBK separated non-affiliates' general unsecured claims from those of affiliates, arguing that third-party vendors lacked the unique access and knowledge that the affiliate creditors had by virtue of their shared ownership, management, objectives, and integrated operations. The affiliate intercompany claims are dissimilar from non-affiliate general unsecured claims and § 1122(a) only permits substantially similar claims to be classified together; and (2) even if the affiliate claims were substantially similar, separate classification of similar claims is permitted so long as it is not for an alleged improper purpose (gerrymandering). The affiliates shared an intention that intercompany claims among them would be paid after the third-party vendors if at all, implying if not expressing an agreement or shared intention of subordinating the affiliates' claims. The factual findings supporting the conclusion that these debtors corporately agreed that their claims would be paid after those of unaffiliated third parties, if at all. The fact findings have ample record support, both in the uncontroverted live testimony of Mr. Santos, ABBK's Executive Vice-President and in the deposition testimony of several witnesses. Debtors should consider subordination agreements or any other events (such as claims objections) that may occur in a chapter 7 liquidation and how they may affect distributions, just as a chapter 7 trustee would, in determining the hypothetical distribution in a chapter 7 liquidation to the affiliate intercompany claimants. The rules for distributions in a chapter 7 case are expressly subject to the subordination provisions in § 510. In determining if the hypothetical liquidation standard is met, 'the court must take into consideration the applicable rules of distribution of the estate under Chapter 7,' including the subordination provisions of §§ 510, 726(a)(3), and 726(a)(4).). The best interests test requires the court to take into account potential claims against insiders, subordinations, and disallowed claims under § 502(d); in a chapter 11 case, the bankruptcy court may 'engage in rational speculation' of what may occur in a chapter 7 liquidation, including whether certain claims may evoke an objection by the chapter 7 trustee. The intercompany claims are different from those of non-affiliate Class 2 creditors. The MLT claims all arose while they shared management with ABBK and knew the status of the Hugoton plant and ABBK’s financial condition, (2) three, if not four, of them, are grounded on written contracts required by the DOE as a condition of its loan guaranty to ABBK-nothing suggested they were the product of any arm’s length bargaining, (3) the liquidation of each is based on book entries, e-mail threads, wire transfers, and in some cases, other source documents such as invoices, (4) only the issuing of invoices and direct payments make these claims look similar to ordinary trade creditor claims, (5) despite scrupulous documentation, no documented demands for payment or collection efforts were made, and (6) none of the affiliates harbored any expectation of payment from ABBK, even when the obligations were incurred. They understood that ABBK was a demonstration project-not a revenue-producing entity. ABBK’s Executive Vice President testified that the complexity of intercompany transfers made it more expeditious to classify them below third-party claims. He also testified that none of the affiliates ever expected to be paid, particularly after the beginning of 2015 when the Hugoton project became plagued with problems and “everybody” knew it would not be profitable. Judgment ABBK. 

LEGAL ANALYSIS: Separate classification of the affiliate intercompany claims is permissible under 11 U.S.C. § 1122(a) as “nothing in the bankruptcy code prohibits the separate classification of like claims into different classes so long as that is not done for the purpose of gerrymandering voting on the plan.” ABBK demonstrated both (1) the uniqueness of the affiliate claims by virtue of their shared ownership, management, and objectives, as well as (2) the subordination understanding among the affiliates. ABBK’s Plan satisfied the best interests of creditors test under § 1129(a)(7). The Bankruptcy Court concluded that the separate classification of intercompany claims below general unsecured claims does not amount to unfair discrimination in violation of § 1129(b)(1) under any of several tests typically employed by courts in this and other circuits. The Plan complies with the absolute priority rule found in § 1129(b)(2)(B) because creditors in class 4 will not receive any proceeds or distributions under the Plan. Finally, the Bankruptcy Court found that the Plan was proposed in good faith and complies with all requirements of § 1129(a), (b)(1), and (b)(2).

The “best interests of creditors” or “chapter 7” test-found in § 1129(a)(7). Section 1129(a)(8) requires that each class of creditors must either accept the plan or not be impaired by it. If a class either rejects or is impaired by the plan, but the other provisions of § 1129(a) are met, the debtor may cram the plan down over a creditor’s objection, but only if it does not unfairly discriminate among the classes and if it is fair and equitable under § 1129(b)(1) and (2).

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