Opinion ID: 658305
Heading Depth: 2
Heading Rank: 6

Heading: The Reserve Requirement

Text: 57 The district court affirmed the bankruptcy court's June 7, 1993 ruling that LTV was not required to fund a reserve based on the full unimpaired value of Frito-Lay's indemnification claims. Frito-Lay maintains that the Plan requires reorganized LTV to establish full reserves for all litigated claims pending their final resolution. Aetna, in its appeal, argues that such reserves are required by the Bankruptcy Code and the United States Constitution as well as by the Plan. We will discuss all of the reserve arguments together as part of our consideration of Aetna's appeal. AETNA ISSUE 58 A. Aetna's Claims for Administrative Priority 59 Prior to the Debtors' Chapter 11 filing, Aetna issued approximately 262 surety bonds on behalf of LTV to secure particular obligations of LTV, including payment of certain workers' compensation claims. After filing for bankruptcy, the Debtors defaulted on the workers' compensation claims that were subject to Aetna's surety bonds. Aetna has paid roughly $42 million to LTV employees under the surety bonds and has asserted bankruptcy claims in that amount as the subrogee of the employees. Under the Plan, Aetna's claims as subrogee are general unsecured claims and as such are impaired. However, claims submitted directly by LTV employees have been paid 100 cents on the dollar; and it is undisputed that workers' compensation claims submitted directly by LTV employees, in respect of the same injuries paid by Aetna, would have been paid on an unimpaired basis. Aetna maintains that there is no adequate rationale for distinguishing between (1) the derivative claims it asserted while standing in the shoes of injured LTV employees and (2) the direct claims of injured employees who filled their own shoes. In briefing before this Court, the Debtors offered the following rationale for the Plan's distinction: 60 Any diminution in the payment of employee entitlements, such as these workers' compensation benefits, would adversely affect employee morale, would undermine labor-management relations and, as the Debtors' past experience indicates, could lead to a serious disruption of the Debtors' operations. Unlike the employees, whose continued assistance and cooperation is vital to the reorganization effort, Aetna has played and will play no productive role in the reorganization effort. 61 The bankruptcy court, in its May 25, 1993 order, held that the separate classification and different treatment of the workers' compensation claims was proper. We are told that Aetna's appeal of that decision is presently before the district court. B. The Reserve Requirement 62 Aetna's sole contention on appeal is that the Plan requires a reserve to be established on the books of reorganized LTV so that, if Aetna ultimately prevails on the merits of its pending objections to the Plan, (1) the reorganized LTV cannot rely on the provision of the Plan that vests all assets not being held for distribution in reorganized LTV free and clear of all claims and interests of creditors; and (2) the reorganized LTV will have enough money to satisfy Aetna's claims. 3 The parties agree that setting up a reserve would require only an accounting entry. By order dated June 11, 1993, the district court affirmed the bankruptcy court's May 25, 1993 denial of Aetna's application for a reserve, and certified Aetna's request for an expedited appeal. On June 22, 1993, this Court permitted Aetna's appeal to proceed on an expedited basis. 63 1. The Plan's Requirements. The reserve requirement of the Plan is not easily summarized because it relies on terms that are defined elsewhere in the Plan by terms that are in turn further defined elsewhere. All told, there are thirteen paragraphs of definitions pertinent to the reserve question. After reviewing the reserve requirement and the related definitions, we agree with the district court that LTV was required to set up reserves only for claims that the Plan classified as unimpaired. 64 The Plan requires that reserves be established for timely-filed, disputed and pending claims that are in one of the classes categorized under the Plan as being unimpaired (the Participating Unimpaired Classes). A claim is disputed (a) if there is an objection as to the amount of the claim; or (b) if there is an objection as to the priority afforded the claim. With respect to disputes concerning amount, the bankruptcy court fixes the claim for reserve purposes. With respect to disputes concerning priority, a reserve must be established based on the highest claimed priority. Reserves must be established in an amount equal to the aggregate Evaluated Disputed Claims in the Participating Unimpaired Classes as of the Effective Date. To understand that phrase, the reader must enter the maze of defined terms. After such a review, the district court held that a reserve is required only if the Plan categorizes the disputed claim as already in the Participating Unimpaired Classes. No reserve for Frito-Lay's and Aetna's disputed claims was therefore necessary. 65 According to Frito-Lay and Aetna, it is absurd to state that their priority claims must already have been categorized as in one of the Participating Unimpaired Classes since LTV's failure to so categorize their claims is the reason the claims are disputed. 66 Upon careful examination of the reserve requirement, we believe that the district court's interpretation is the only one that is tenable. The reserve requirement assures that a claimant who has already been placed in an unimpaired class, but whose status in that class is subject to an ongoing dispute (due to an objection, for example, by the estate or by an unsecured creditor), will not lose its already established priority and its ability to collect in full merely because another of the Plan's provisions denies payment of disputed claims on the effective date. The Plan does not require LTV to post reserves that presuppose the priority of every claim as to which priority has been asserted. Otherwise, general unsecured claimants asserting priority could obstruct consummation of the Plan pending appellate review by requiring the establishment of reserves so large as to preclude a fresh start. 67 2. Bankruptcy Code and Constitutional Requirements. Aetna argues in the alternative that if the Plan itself does not expressly require the Debtors to set up a reserve, then such a provision must be read into the Plan in order for it to comply with the Bankruptcy Code and the United States Constitution. Under Paragraph 5.4B of the Plan, all funds not distributed when the Plan goes into effect vest in the reorganized LTV free and clear of all claims and interests of creditors. Aetna argues that Paragraph 5.4B, absent some mechanism to ensure full recovery to a party that first succeeds in establishing its priority status on appeal, is incompatible with Bankruptcy Code Section 1129(a)(9)(A), which requires full cash payment of all administrative claims, 11 U.S.C. 1129(a)(9)(A) (1988). Aetna thus contends that its appellate rights under the Code are rendered meaningless, in violation of the Constitution's right to due process. 68 Aetna's argument is vastly overdrawn. A claimant in Aetna's position may seek to stay a plan's confirmation pending appeal; Aetna has argued unsuccessfully for such a stay to the bankruptcy court, the district court, and a prior panel of this Court. In addition, as our discussion of mootness makes plain, the granting of effective relief is not necessarily foreclosed by the substantial consummation of a reorganization plan. But neither the Bankruptcy Code nor tenets of due process require that a reorganized company in effect bond an appeal by a losing claimant. 69 Having determined that neither the Bankruptcy Code, the United States Constitution nor the Plan require LTV to reserve fully for claims pending appeal, we refuse otherwise to grant such relief.