Opinion ID: 15681
Heading Depth: 1
Heading Rank: 2

Heading: A of the term sheets provided as follows:

Text: SWEPCO agrees to support the Joint Member/SWEPCO Plan, as the same may be modified or amended by mutually agreeable changes that do not alter the Joint Members/SWEPCO Plan in material respects (“Joint Plan”), through the confirmation hearing process and to provide wholesale power to the Members pursuant to the terms and provisions set forth hereinabove upon confirmation and the effective date of the Joint Plan, subject to the terms and conditions set forth in the Asset Purchase Agreement and Joint Plan, as long as a majority of the Members (measured by numbers of customers) support the Joint Plan. The members agree to continue to exclusively support the Joint Plan, subject to the Bankruptcy Code and Rules, through the confirmation hearing process and, if the Joint Plan is confirmed, then, at the effective date of the Joint Plan, to enter into a Power Supply Agreement with SWECO, pursuant to the terms and conditions set forth hereinabove, as such terms may be modified or amended, and including other conditions and terms agreed to by the parties. The members may elect to discuss provisions of a wholesale power supply agreement with third parties; however, the Members, subject to the Bankruptcy Code and Rules, shall not agree to enter into a Power Supply Agreement with any other person or persons unless or until an order is issued i) denying confirmation of the Joint Plan; ii) confirming a plan proposed by another plan proponent; or iii) expressly authorizing support of another plan that has been 10 materially amended from its current version. Additionally, Paragraph V.C of the term sheets set forth the following agreement regarding cost reimbursement: SWEPCO and the Members have reached an agreement on certain transitional cost reimbursement provisions as set forth in [the letter of SWEPCO’s counsel] to Mr. Kleiman dated January 9, 1997; and this agreement is currently being implemented. SWEPCO will reimburse the Members fifty (50%) of reasonable bankruptcy counsel litigation expenses (expenses of Altheimer & Gray and Dann, Pecar, Newman & Kleiman) and expert expenses incurred in support of the Joint Plan, on a monthly basis, beginning January 1, 1997. In the event the SWEPCO Plan is confirmed, SWEPCO also agrees to reimburse the cooperatives for reasonable outstanding bankruptcy litigation and expert expenses incurred in support of the Joint Plan up to the total cumulative sum (for all past or future payments) of $5,000,000, which sum may be increased pursuant to mutual agreement. C. Litigation Regarding the Payments On April 18, 1997, the Trustee filed a response to the Joint Report and a combined motion and memorandum seeking denial of confirmation of the SWEPCO Plan and/or disgorgement of the payments that SWEPCO made to the CCM. In his motion, the Trustee claimed that SWEPCO’s payments to the CCM were not adequately disclosed prior to being made and violated 11 U.S.C. § 1129(a)(4)’s requirement that [a]ny payment made . . . by the proponent [of a plan of reorganization] . . . for services or for costs and expenses in or in connection with the case, or in connection with the plan and incident to the case, [be] . . . approved by, or subject to the approval of, the court as reasonable. 11 U.S.C. § 1129(a)(4). The Trustee additionally argued that the 11 payments violated § 1129(a)(1), (2), and (3) of the Bankruptcy Code because they resulted in discrimination amongst creditors and circumvented the “Bankruptcy Code’s provision respecting the rights of secured creditors and the priority of payments to creditors established by the Code.” The bankruptcy court conducted a hearing on the Trustee’s motion during which it heard six days of testimony from sixteen witnesses and received eighty exhibits into evidence. Representatives of the remaining CCM members, as well as SWEPCO’s president, testified that, as they understood the agreement between SWEPCO and the CCM members, the only condition that SWEPCO placed upon the two $500,000 transition payments was that the CCM members would be required to return the funds in the event that another plan was confirmed and they received reimbursement from the proponent of the confirmed plan. On September 3, 1997, the bankruptcy court issued a detailed oral ruling denying the Trustee’s motion. The bankruptcy court made the following findings of fact that are germane to this appeal: As early as November 16, 1996, SWEPCO and the committee were conducting negotiations with respect to reimbursement of fees and expenses, which negotiations the Court found within the certain expenses referred to in the second sentence of the disclosure statement. I believe this was of the subject of Mr. Klieman’s [sic] memorandum to the Members on that date,2 which 2 The bankruptcy court’s reference to the date of this memorandum indicates that it intended to say that SWEPCO and the 12 transmitted SWEPCO’s offer with respect to fees. At the Hilton meeting on January 7, Mr. Smith, SWEPCO’s president, for the first time suggested an immediate $1 million payment. He testified that the payment was made to assist the members in their ongoing struggle for confirmation of the SWEPCO and Members plan. The evidence is overwhelming that the $1 million payment, by whatever name you choose to call it, was generally made without strings attached. There is no credible evidence which suggests otherwise. The only requirement was that the funds would be repaid to SWEPCO in the event that the following happened, another plan was confirmed and the Members received reimbursement under the confirmed plan. The members also agreed to use their best effort to negotiate expense reimbursement, as a successful plan proponent. The question was asked of several witnesses, including Mr. Smith, what did SWEPCO get for their $1 million. The answer was generally uniform, nothing. The Court believes, though, that while there was nothing specific that SWEPCO either asked for or was promised, surely they anticipated that the money would not be used in order to benefit either of the competing plans of Enron or Louisiana Generating, but would, in some way, further SWEPCO’s chances of success. I do not find this to be inappropriate. The fact is that SWEPCO was and is a major player in this Chapter 11 case. Mr. Smith was in court when the Dan Pecar firm [Kleiman’s firm] was disqualified, and he saw the impact of the decision on the joint confirmation effort of SWEPCO and the Committee. There was no testimony whatsoever that the payment had been discussed or even contemplated prior to January 7. The Court finds the payment to be as characterized by SWEPCO, and that is a transition assistance payment. To be sure, allegations of vote buying have surfaced with respect to this payment. At the time the payment was conceived and when it was made, however, the votes were already in. The ballots were filed in early December 1996. Each member had already voted for the SWEPCO plan. As stated earlier in the terms of the letter of Mr. Gilliam [SWEPCO’s counsel] of January 9, CCM had been conducting negotiations regarding reimbursement of fees and expenses as early as November 13 rather than 16. 13 clearly indicate that the payment did not lock in any of the members. They were free to meet and negotiate. In fact, they did. A complaint was further made that SWEPCO did not disclose the payment to the Court until the Trustee learned of the payment in early April and forced SWEPCO to make the disclosure. The Court finds that while the negotiations between SWEPCO and the committee were deemed confidential at the time, there was at all times an intent to make disclosure of the payment at an appropriate time. This is clearly borne out by reference to the draft of the term sheet originally dated in February 1997. The Court further concludes that the second sentence in the SWEPCO disclosure statement placed all parties on notice of the possibility of the payment of additional funds may be negotiated. And I do not believe that this second sentence of the disclosure statement should be narrowly construed. In late April 1997, SWEPCO and the committee, the reconstituted committee, caused to be filed with the court a term sheet executed by the parties. There was, in Paragraph 5, language under the phrase “additional terms,” additional language with respect to fee and expense reimbursement. And I believe that the inclusion of this language in that agreement was merely the culmination of the months of negotiation between SWEPCO and the committee. The Trustee and others point to a lock-in which was contained in Paragraph 6 of the term sheet, entitled “Agreement and Obligations of the Parties,” requiring Members to exclusively support the joint plan. . . . I do not find, however, that the provisions of Paragraph 6 of the term sheet suggest that any violations or any lock-in has occurred. The bankruptcy court went on to hold that the payments were subject to § 1129(a)(4) but that § 1129(a)(4) did not require the court’s approval of the payments prior to their being made. It therefore ordered SWEPCO and the CCM to file an application “seeking nunc pro tunc approval of the payment[s].” It further 14 ordered SWEPCO to make no further payments to the CCM or its members unless and until the court found the previously made payments reasonable. Pursuant to the bankruptcy court’s instructions, on October 2, 1997, SWEPCO and the CCM filed such an application. The bankruptcy court denied the application without prejudice on March 17, 1998. On April 15, 1998, SWEPCO and the CCM filed a renewed application, which remains pending before the bankruptcy court. The Trustee sought leave of the district court to appeal the bankruptcy court’s denial of his motion, and the district court granted permission to appeal. On appeal, the district court held that the bankruptcy court erred in concluding that (1) SWEPCO’s supplemental disclosure statement adequately disclosed its payments to the CCM and (2) the payments were not conditioned upon the CCM’s exclusive support of the SWEPCO Plan. On this basis, the district court concluded that the payments violated 11 U.S.C. § 1129(a)(4) because SWEPCO failed to obtain prior approval of the payments from the bankruptcy court and the payments were made to lock in votes, § 1125 because SWEPCO had failed to fully disclose the payments, § 1123(a)(4) because the payments constituted discriminatory treatment of creditors within the same class, § 1129(b)(2)(B) because the payments violated the absolute priority rule, and § 1129(a)(3) because the payments and their concealment were improper and constituted bad faith. The district court therefore ordered “disqualification” of the SWEPCO 15 Plan on the ground that it is unconfirmable as a matter of law3 and ordered disgorgement of the funds paid by SWEPCO to the CCM members. SWEPCO and the CCM appeal these orders. On July 10, 1998, we stayed the district court’s orders. Convinced that prompt confirmation of a plan by the bankruptcy court is of utmost importance to all parties in interest, we expedited this appeal, obtained full briefing, heard extended oral argument by the parties on August 4, and now render our decision.