Durango Ga. Paper Co. v. Pension Benefit Guaranty Corp. (In re Durango Ga. Paper Co.)

539 B.R. 896

In re: Durango Georgia Paper Company, Durango Georgia Converting Corporation, and Durango Georgia Converting LLC, DebtorsDurango Georgia Paper Company, Durango Georgia Converting Corporation, and Durango Georgia Converting LLC, Plaintiffs

v.Pension Benefit Guaranty Corporation, Defendant

CASE NUMBER 02–21669 JOINTLY ADMINISTERED

ADVERSARY PROCEEDING NUMBER 15–02009

United States Bankruptcy Court, S.D. Georgia, Brunswick Division.

Signed October 5, 2015

Ward Stone, Jr., Stone & Baxter, LLP, Macon, GA, for Plaintiffs.

Nathaniel Rayle, Pension Benefit Guaranty Corporation, Washington, DC, for Defendant.

OPINION AND ORDER OF DISMISSAL WITH PREJUDICE

JOHN S. DALIS, United States Bankruptcy Judge

Pursuant to notice, hearing was held on the Motion to Dismiss (“Motion”) by Defendant Pension Benefit Guaranty Corporation, with response in opposition by Plaintiffs/Debtors Durango Georgia Paper Company, Durango Georgia Converting Corporation, and Durango Georgia Converting LLC, acting by and through their Liquidating Trustee, National CRS LLC. For the reasons that follow, the Motion is granted, and the Complaint for Equitable Subordination of Claim is dismissed with prejudice.

BACKGROUND

The Pension Benefit Guaranty Corporation (“PBGC”) is a corporation within the Department of Labor, 29 U.S.C. § 1302(a), that administers the federal government's insurance program for private pension plans under the Employee Retirement Income Security Act of 1974 (“ERISA”), including pension plan terminations under 29 U.S.C. §§ 1301 –1461. Here, the PBGC has two disputed claims pending in the underlying bankruptcy case: Claim No. 1576 and Claim No. 1581.

The claims are based on debts related to the defined benefit pension plan (“Pension Plan”) created by the original owner of a paper mill in St. Marys, Georgia (“Mill”) in 1965. As a result of a stock sale in December 1999, the Debtors acquired the Mill and became jointly and severally liable under 29 U.S.C. § 1307(e)(2) for the PBGC pension insurance premiums. This liability is the basis of Claim No. 1576.¹

By the time the Debtors' jointly administered bankruptcy cases were filed in 2002, the Mill had ceased operations. But the Pension Plan did not terminate until March 1, 2004.² As of that date, the Debtors became jointly and severally liable for the total amount of unfunded benefit liabilities under 29 U.S.C. § 1362(b) (“Termination Liability”), amounting to possibly as much as $55 million (Compl. ¶ 32). This liability is the basis of Claim No. 1581.³

THE COMPLAINT

This adversary proceeding seeks equitable subordination of the PBGC's claim for the Termination Liability under 11 U.S.C. § 510(c), asserting that the PBGC not only had every opportunity but also was requested numerous times to intervene in the Liquidating Trustee's nearly eleven-year adversary proceeding seeking to recover the amount of the Termination Liability from the Mill's previous owners (“Pension Defendants”).⁴

In that adversary proceeding, the Liquidating Trustee alleged, among other counts, that the Pension Defendants sold the Mill primarily to avoid the Termination Liability, thereby violating ERISA, 29 U.S.C. §§ 1362, 1369. Had the Liquidating Trustee prevailed on the ERISA count (“Pension–Related Claim”), any money recovered would have offset the more–than–50% dilution in distributions to all general unsecured creditors, including the PBGC, if the PBGC's claim for the Termination Liability is allowed as a general unsecured claim. (See Compl. ¶ 66.)

But the Liquidating Trustee did not prevail. The Eleventh Circuit Court of Appeals affirmed the dismissal of the Pension–Related Claim, holding that it failed to state a claim because it was brought for the benefit of the unsecured creditors in the bankruptcy cases, not for the benefit of the PBGC. Durango–Georgia Paper Co. v. H.G. Estate LLC, 739 F.3d 1263, 1273 (11th Cir.2014).⁵

In its opinion, the Eleventh Circuit noted that the PBGC itself could have sued the Pension Defendants for the Termination Liability, but “declined to do so.” Id. at 1272. That opportunity is now permanently foreclosed, the six-year statute of limitations having run. Id. at 1272 n. 24.

The dismissal of the Pension–Related Claim had a collateral consequence as well: the stipulated dismissal of a second adversary proceeding the Liquidating Trustee had filed in 2009 to ensure the Pension Defendants' ability to satisfy the anticipated judgment under ERISA.⁶ That second lawsuit sought to avoid the Pension Defendants' transfer of a $200 million photography collection to the Metropolitan Museum of Art in New York, alleging that the transfer was made while the Pension–Related Claim was pending. The Eleventh Circuit's ruling that the Liquidating Trustee had no standing to pursue the Pension–Related Claim destroyed the legal basis of the fraudulent transfer claim; hence, the stipulated dismissal.

The Liquidating Trustee now alleges that the PBGC's refusal to either intervene or bring its own action under ERISA against the Pension Defendants was inequitable conduct that injured the remaining unsecured creditors, requiring equitable subordination of the PBGC's claim for the Termination Liability. Alternatively, the Liquidating Trustee argues that even if the PBGC's refusal to either intervene or bring its own action was not inequitable conduct, the resulting injury to the unsecured creditors alone is a sufficient ground for equitable subordination of the claim.

THE MOTION TO DISMISS

I. The Standard Under Rule 12(b)(6).

A complaint may be dismissed for “failure to state a claim upon which relief may be granted.” Fed. R. Civ.P. 12(b)(6).⁷ To survive a motion under Rule 12(b)(6), the complaint must state a claim that is facially plausible. Ashcroft v. Iqbal, 556 U.S. 662, 679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). This standard “does not impose a probability requirement at the pleading stage, it simply calls for enough facts to raise a reasonable expectation that discovery will reveal evidence of [the necessary element].” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). When the questions at issue are purely legal, “there is no inherent barrier to reaching the merits at the 12(b)(6) stage.” Marshall Cty. Health Care Auth. v. Shalala, 988 F.2d 1221, 1226 (D.C.Cir.1993).

The court “construes the complaint in the light most favorable to the plaintiff and accepts all well-pled facts alleged in the complaint as true.” Sinaltrainal v. Coca–Cola Co., 578 F.3d 1252, 1260 (11th Cir.2009). Although the court makes reasonable inferences in the plaintiff's favor, it is not required to draw the plaintiff's inferences or to accept the plaintiff's legal conclusions. Id. “[U]nsupported conclusions of law or of mixed fact and law have long been recognized not to prevent a Rule 12(b)(6) dismissal.” Gonzalez v. Reno, 325 F.3d 1228, 1235 (11th Cir.2003). Ultimately, the court must draw on its judicial experience and common sense, reading the complaint as a whole, not parsing it piece by piece. Braden v. Wal–Mart Stores, Inc., 588 F.3d 585, 594 (8th Cir.2009).

II. The Complaint Fails to State a Claim.

All the pleaded facts accepted as true, resolution of the Motion to Dismiss turns on three questions of law: first, whether the PBGC's claim may be equitably subordinated in the absence of inequitable conduct by the PGBC; second, whether the PBGC is an “insider” for the purpose of establishing inequitable conduct,⁸ and third, whether it was inequitable for the PBGC not to either intervene in the Liquidating Trustee's lawsuit⁹ or to bring its own lawsuit against the Pension Defendants.

The answer to each of these questions is no: The PBGC's claim may not be equitably subordinated in the absence of inequitable conduct; the PBGC is not an insider; and the PBGC's decision not to either intervene or to file its own action was not inequitable. The Complaint thus fails to state a claim.

But even without these fatal defects, the Complaint still would fail. What the Liquidating Trustee has not shown—and under the circumstances, cannot show—is a causal connection between the PBGC's decision not to pursue an action against the Pension Defendants and the alleged injury to the other unsecured creditors.

A. The PBGC's Claim May Not Be Equitably Subordinated in the Absence of Inequitable Conduct.

The bankruptcy court has the power “under principles of equitable subordination [to] subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim.” 11 U.S.C. § 510(c)(1). The phrase “under principles of equitable subordination” indicates congressional intent “at least to start with” the principles of equitable subordination as judicially developed over the decades before the Bankruptcy Code was enacted in 1978. United States v. Noland, 517 U.S. 535, 539, 116 S.Ct. 1524, 134 L.Ed.2d 748 (1996) ; see also Merrimac Paper Co. v. Harrison (In re Merrimac Paper Co.), 420 F.3d 53, 59 (1st Cir.2005) (“[T]he Supreme Court has made clear that in administering [§ 510(c) ], the starting point should be the compendium of judge-made principles of equitable subordination that existed prior to 1978....”).

Those judge-made principles include the requirement of the claimant's inequitable conduct, as set out nearly forty years ago by the Fifth Circuit Court of Appeals in Benjamin v. Diamond (In re Mobile Steel Co.), 563 F.2d 692 (5th Cir.1977). Described by the United States Supreme Court as “influential,” 517 U.S. at 538, 116 S.Ct. 1524, the Mobile Steel test continues to be applied by “the vast majority” of courts, Enron Corp. v. Springfield Assocs., LLC (In re Enron Corp.), 379 B.R. 425, 433 (S.D.N.Y.2007). Further, it is mandatory authority in the Eleventh Circuit.¹⁰

The Mobile Steel test has three prongs:

(i) The claimant must have engaged in some type of inequitable conduct.

(ii) The misconduct must have resulted in injury to the creditors of the bankrupt or conferred an unfair

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