Opinion ID: 710247
Heading Depth: 2
Heading Rank: 2

Heading: Control of the Reorganized Cooperative

Text: 50 REA makes another argument that the Wabash Plan violates the absolute priority rule by allowing the Members to retain control of the cooperative through the appointment of representatives to its Board. The issue is whether this type of control constitutes property which is retained on account of  prior interests of the Members. 51 The absolute priority rule is an aspect of the requirement that a plan be fair and equitable. There is some appearance of unfairness in the Wabash Plan. Wabash's member distribution cooperatives, whose representatives approved the Marble Hill fiasco, emerge from bankruptcy in the driver's seat, still paying low rates, and still not paying off the REA debt. This outcome, however, is justified, even dictated, by Wabash's cooperative structure. The Members, by controlling Wabash, control their own rates, making it possible for them to be served under the 40-year requirements contracts, which are, in turn, Wabash's most valuable possession. 52 In addition to its technical compliance with the absolute priority rule, the retention of control by Wabash Members is not as unfair as it might seem, given REA's role in encouraging investment in nuclear plants. 7 In addition, since Wabash was specifically designed to supply its own Members, their continuation as customers in control of Wabash is a means of maximizing the value of the estate for the benefit of creditors. 53
54 Non-profit cooperatives are creations of the legislature. Cooperatives are designed explicitly to allow customers to receive the benefits, in the form of lower prices, which might ordinarily accrue to the owners of equity. While it is true that customers profit from this arrangement in some rough sense, the statutory scheme specifically rejects the concept that these savings are profits accruing to ownership. The potential for lower prices is simply not an interest cognizable in bankruptcy. Nor, for that matter, are price benefits income for tax purposes. Members join electric cooperatives with the expectation of access to electricity and in anticipation of low rates. But, neither the lower rates themselves nor any refunds of overcharges, which are mandated to avoid the making of a profit, constitute property received on account of an equity interest. 55 REA cites cases holding that control is property for purposes of the absolute priority rule. See, e.g., Ahlers; In re Stegall; In re Genesee Cement, Inc., 31 B.R. 442 (Bankr.E.D.Mich.1983); In re Pecht, 53 B.R. 768 (Bankr.E.D.Va.1985). These are, however, business corporation cases. In the ordinary commercial context, the prerogatives of equity ownership include not only the right to control corporate decisionmaking but also the right to a share in profits and in the ownership of corporate assets on dissolution. When associated with an equity interest in a business corporation, control contributes to value--hence the premium investors are willing to pay for a controlling interest in a business corporation. Indeed, as recognized by the Supreme Court in Ahlers, control of a profit-making entity in which one holds an equity interest is valuable even where debts far exceed the current value of assets because of the interest in potential future profits of a now-insolvent business. 485 U.S. at 208, 108 S.Ct. at 969 (dismissing the no value argument made by the debtor). Control is not essential to an equity interest, as the existence of non-voting stock demonstrates. A share of profits, however, is essential. Control alone, divorced from any right to share in corporate profits or assets, does not amount to an equity interest. 56 The mere fact that the Members of Wabash are benefited by Wabash's operation and might be disadvantaged by its demise also does not give them an interest cognizable in bankruptcy. Employees, managers and customers, among others, always have an interest, in the broadest sense, in a corporation. The factor which distinguishes these parties from stockholders is not control per se (managers, after all, have at least a limited control) but the ability to make use of that control to generate profits or to increase their own share of profits. 57 In re Whittaker Memorial Hospital Ass'n, 149 B.R. 812 (Bankr.E.D.Va.1993) illustrates this point. Whittaker concerned a non-profit hospital. There the bankruptcy court held that the retention of control of the hospital by the same individuals who controlled it prior to bankruptcy did not violate the absolute priority rule since the present group retaining control over the debtor entity does not give them anything, certainly not a favored position over [the dissenting creditor].... Clearly there is no distribution to this group and nothing beyond control that passes to it. Id. at 816. Cf. In re S.A.B.T.C. Townhouse Ass'n, 152 B.R. 1005 (Bankr.M.D.Fla.1993) (precluding members of non-profit cooperative from retaining control of cooperatively owned real estate). 58 The Whittaker result seems clear since, among other things, the individuals exercising control over that non-profit corporation were not themselves users of its service. In an electric cooperative, on the other hand, each member has two roles. As a participant in control of the cooperative, each member is required by Indiana law and the rules of the organization to keep rates low. In its role as customer, each member benefits to the extent that rates are kept low. This is an inescapable product of the cooperative form, however, and of the identity of users and controllers. This is not exploitation of insider status of the sort the absolute priority rule was designed to prevent. 59 There is no essential difference between allowing the Whittaker board to remain in control of the hospital and allowing the Members to remain in control of Wabash. The board of a non-profit organization has a fiduciary duty to manage the organization according to the best interests of the population it is intended to serve (in the case of Wabash, the Member-customers). The cooperative structure simply recognizes the obvious fact that the Members themselves can be counted on to take that duty seriously. 60
61 REA was and is, of course, fully aware of the identity of Wabash's Members as (1) controllers of its operations and (2) users of its power. In making loans, REA may be charged with knowledge of Wabash's structure in the same way that a lender to a business corporation would know that stockholders are not ordinarily liable for the debts of the corporation. To address the problem of Wabash's structure, REA relied primarily on its security interest in Wabash's 40-year Supply Contracts with its Members, which were to provide a reliable source of revenue from which Wabash could pay its debt. See Tri-State Generation & Transmission Ass'n v. Shoshone River Power, Inc., 874 F.2d 1346, 1349-50 (10th Cir.1989); United States v. Southwestern Electric Coop., Inc., 869 F.2d 310, 312 (7th Cir.1989) (discussing this REA practice). The principal reason that these contracts did not fulfill this purpose was the refusal of Indiana regulators to recognize Marble Hill as an asset for rate-making purposes. If the issue is whether REA or Wabash's Members should bear the burden of the Marble Hill debacle, it is not immediately apparent why the Members are more culpable. Presumably, REA, a promoter of nuclear power, 8 knew the risks as well as anyone.
62 REA is by far the biggest unsecured and secured creditor of Wabash. A cramdown of the Wabash Plan over REA's strenuous opposition is therefore a very serious matter and one requiring the most careful consideration of whether the Plan is fair and equitable to REA. To be weighed in the balance, however, is the fact that the only apparent alternative to a cramdown is liquidation, under which REA's recovery would be less than under the Wabash Plan. Thus, the bankruptcy court found that Wabash has a going-concern value of $190 million, a liquidation value of $213.2 million and a maximum value to Wabash's Members of $221.7 million. The greater magnitude of the last figure provides a good reason for leaving Wabash's structure intact. The REA Reorganization Plan, on the other hand, which would have required substantial (and presumably unrealizable) rate increases, was rejected by the bankruptcy court and no appeal has been taken. There is, therefore, no indication that an alternative to the Wabash Plan, other than liquidation, exists. This is a consideration which certainly does not excuse compliance with the absolute priority rule, but it is nonetheless a fact of which we must remain aware. 63 Under the Wabash Plan, REA is being awarded its share of Wabash's going-concern value in partial satisfaction of its secured debt. In addition, and extremely important to the economics of the Wabash Plan, REA will also recover a portion of the PSI Settlement, which is only available under the Wabash Plan, and small amounts from other sources. The total amount REA will receive in satisfaction of its secured claim is approximately $400 million. Further, under the Plan, REA is to receive, in partial satisfaction of its unsecured debt, an additional amount representing the value to Wabash's Members of the cost savings achieved by having Wabash as a supplier of power. Thus REA's total recovery under the Wabash Plan is $430.6 million and all creditors together will receive approximately $457 million. No non-Member control could squeeze as much out of Wabash as a going concern and considerably less could be realized by liquidation, particularly considering the loss of the PSI Settlement.