Fenicle v. Debtors Energy Future Holdings Corp. (In re Energy Future Holding Corp.)

596 B.R. 473

IN RE: ENERGY FUTURE HOLDING CORP., et al., Debtors.

Shirley Fenicle, Individually, and as Successor-in-Interest to the Estate of George Fenicle, David William Fahy, John H. Jones, David Heinmann, Harold Bissell, Kurt Carlson, Robert Albini, Individually, and as Successor-in-Interest to the Estate of Gino Albini, and Denis Bergschneider, Appellants;

v.Debtors Energy Future Holdings Corp., et al., and The EFH Plan Administrator Board, Appellees.

Civil Action No. 18-381-RGA

Bankruptcy Case No. 14-10979

United States District Court, D. Delaware.

Signed January 24, 2019

Daniel K. Hogan, HOGAN MCDANIEL, Wilmington, DE, attorney for Appellants.

Leslie M. Kelleher (argued) and Jeanna M. Koski, CAPLIN & DRYSDALE, CHARTERED, Washington, DC, attorneys for Appellants Shirley Fenicle, individually and as successor-in-interest to the Estate of George Fenicle, and David William Fahy.

Steven Kazan, KAZAN MCCLAIN SATTERLEY & GREENWOOD, Oakland, CA, attorney for Appellants Shirley Fenicle, individually and as successor-in-interest to the Estate of George Fenicle, and Denis Bergschneider.

Jeffrey M. Schlerf, FOX ROTHSCHILD LLP, Wilmington, DE; Thomas E. Lauria, Matthew C Brown, and Joseph A. Pack, WHITE & CASE LLP, Miami, FL; J. Christopher Shore (argued), WHITE & CASE LLP, New York, NY, attorneys for Appellee Reorganized EFH/EFIH Debtors.

Jason M. Madron, RICHARDS, LAYTON & FINGER, P.A., Wilmington, DE; Mark McKane (argued), KIRKLAND & ELLIS LLP, San Francisco, CA; James H.M. Sprayregen, Marc Kieselstein, Chad J. Husnick, KIRKLAND & ELLIS LLP, Chicago, IL; Aparna Yenamandra, KIRKLAND & ELLIS LLP, New York, NY, attorneys for Appellee EFH Plan Administrator Board.

MEMORANDUM OPINION

ANDREWS, U.S. DISTRICT JUDGE:

Currently pending before the Court is an appeal from the Bankruptcy Court's Order Confirming the First Amended Joint Plan of Reorganization of Energy Future Holdings Corp. ("the Confirmation Order"). (D.I. 1-1). Also pending is Appellees' Motion to Dismiss the Appeal. (D.I. 40). The parties have fully briefed the issues. (D.I. 30, 40, 54, 59). The Court held oral argument on December 13, 2018. (D.I. 64). For the following reasons, the Court dismisses the appeal as statutorily moot.

I. BACKGROUND

Energy Future Holdings Corp. ("EFH") and several subsidiaries (together, the "Debtors") filed Chapter 11 petitions on April 29, 2014. (D.I. 30 at 13). A subsidiary of EFH, Debtor Energy Future Intermediate Holding Company LLC, held approximately 80% ownership interest in Oncor Electric Delivery Company LLC ("Oncor"). (Id. ). Oncor is subject to the regulatory authority of the Public Utility Commission of Texas ("PUCT"). (Id. ) Previous plans were approved by the Bankruptcy Court but did not become effective because PUCT did not approve the necessary transactions. (Id. ) The Confirmed Plan incorporates a merger transaction between Sempra Energy ("Sempra") and Debtor EFH. (Id. ). PUCT approved the transaction with Sempra, and the Confirmed Plan became effective March 9, 2018. (Id.; D.I. 40 at 33).

Debtors EECI, Inc., EEC Holdings, Inc., LSGT Gas Co. LLC, and LSGT SACROC, Inc. (the "Asbestos Debtors") are wholly-owned subsidiaries of EFH. (D.I. 30 at 14). The Asbestos Debtors were in the business of building, maintaining, and servicing power plants. (Id. ) Workers in those power plants were exposed to asbestos. (Id. ) The last of the Asbestos Debtors' operating assets were sold in 2004 and the proceeds of those sales were up-streamed to EFH as interest bearing loans. (Id. ).

During the bankruptcy proceedings, the Debtors moved the Bankruptcy Court to set a bar date for all prepetition claims (the "Bar Date Motion"). (Id. at 15). The United States Trustee appointed an official creditors' committee comprising five unsecured creditors of EFH, EFIH, EFIH Finance, Inc., and EECI (the "E-Side Committee"). (D.I. 30 at 16; D.I. 40 at 19). After hearing objections on the Bar Date Motion, the Bankruptcy Court ordered that there would be a bar date for all prepetition claims, including those of Unmanifested Asbestos Claimants.¹ (D.I. 30 at 16; D.I. 40 at 20). This order was not appealed by any party. (D.I. 40 at 21). As the bankruptcy proceedings continued, Appellants² made repeated efforts to ensure that the Unmanifested Asbestos Claims were not discharged. (D.I. 40 at 24-30).

The Confirmation Order was entered on February 27, 2018. (B.D.I. 12763).³ The Confirmation Order approved the reorganization plan ("the Plan"), including the Merger Agreement, a central piece of the restructuring transactions.⁴ The Plan and Merger Agreement, as approved, provided for the restructuring of the EFH and Asbestos Debtors, including the sale of the EFH Debtors to Sempra. Appellants did not seek a stay of either the Order authorizing the merger agreement or the Confirmation Order. Appellants filed a timely notice of appeal on March 9, 2018. (D.I. 1). On appeal, Appellants assert, among other things, that the Bankruptcy Court erred in discharging the claims of Unmanifested Asbestos Claimants who failed to timely file proofs of claim. (D.I. 30 at 21).

Appellees⁵ move to dismiss this appeal on the following grounds: statutory mootness, equitable mootness, untimeliness, and standing. (D.I. 40 at 22). Appellees also argue that the Bankruptcy Court did not violate Due Process by discharging the claims of the Unmanifested Asbestos Creditors who failed to timely file proofs of claim. (Id. at 56). The constitutional issue is an interesting one. Courts should, however, avoid deciding constitutional issues unnecessarily, Bowen v. United States , 422 U.S. 916, 920, 95 S.Ct. 2569, 45 L.Ed.2d 641 (1975), and therefore I express no opinion about it.

II. JURISDICTION

Appeals from the Bankruptcy Court to this Court are governed by 28 U.S.C. § 158. District Courts have mandatory jurisdiction to hear appeals "from final judgments, orders, and decrees." 28 U.S.C. § 158(a)(1). The Confirmation Order is a final order.

III. LEGAL STANDARD

The Bankruptcy Code provides,

The reversal or modification on appeal of an authorization under [ 11 U.S.C. § 363(b) or (c) ] of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.

11 U.S.C. § 363(m). Only a good faith purchaser can claim the protections of § 363(m). Therefore, the Court is "first required to ask whether the purchaser ... ‘purchased ... [the] property in good faith.’ " In re Pursuit Capital Management, LLC , 874 F.3d 124, 135 (3d Cir. 2017) (quoting 11 U.S.C. § 363(m) ). If its protections are warranted, § 363(m)"moots a challenge to a sale if two conditions are satisfied: ‘(1) the underlying sale or lease was not stayed pending the appeal, and (2) the court, if reversing or modifying the authorization to sell or lease, would be affecting the validity of such a sale or lease.’ " Pursuit , 874 F.3d at 135 (quoting Krebs Chrysler-Plymouth, Inc. v. Valley Motors, Inc. , 141 F.3d 490, 499 (3d Cir. 1998) ). If an order authorizing a sale is not stayed during the pendency of an appeal, the appeal is moot where the "requested remedy, if entered, would affect the validity of the sale." Pursuit , 874 F.3d at 127 ; see also In re ICL Holding Co. , 802 F.3d 547, 554 (3d Cir. 2015) ("the provision stamps out only those challenges that would claw back the sale"). "The purpose of § 363(m) is to promote the finality of sales." Pursuit , 874 F.3d at 133. "Without it, the risk of litigation would chill prospective bidders or push them to ‘demand a steep discount.’ " ICL Holding , 802 F.3d at 554 (quoting In re River West Plaza-Chicago, LLC , 664 F.3d 668, 671 (7th Cir. 2011) ).

"A challenge to a ‘central element’ of a sale inevitably challenges the validity of the sale." Pursuit , 874 F.3d at 139 (citing Pittsburgh Food & Beverage, Inc. v. Ranallo , 112 F.3d 645, 649 (3d Cir. 1997) ). "The validity prong of § 363(m) provides a narrow exception that may lie for challenges to the Sale Order that are so divorced from the overall transaction that the challenged provision would have affected none of the considerations on which the purchaser relied." Pursuit , 874 F.3d at 139 (cleaned up).

IV. DISCUSSION

A. The Confirmation Order is a "Sale Order" under § 363(m)

Appellees assert that the Confirmation Order was an "order authorizing the sale" under § 363(m) because "the Debtors could not have consummated the sale absent the Bankruptcy Court's authorization in the Confirmation Order." (D.I. 59 at 11). Appellants argue that the Confirmation Order does not trigger the protections of § 363(m) because 1) the sale order was the order approving the merger and 2) § 363(m) only addresses direct appeals, not collateral attacks on sales orders. (D.I. 54 at 30).

I agree with Appellees. The Confirmation Order is an "order authorizing the sale" under § 363(m). Where "the underlying asset sale [is] conducted under § 363(b) of the Bankruptcy Code... it implicates 11 U.S.C. § 363(m)." ICL Holding , 802 F.3d at 553. Appellants contend that the Confirmation Order cannot be an "order authorizing the sale" because the Bankruptcy Court previously entered a separate order approving the Merger Agreement. (B.D.I. 11873). That Order authorized the "Debtors' entry into the Merger Agreement" and approved the Merger Agreement in "its entirety." (Id. at 3). However, the Merger Agreement specifically provided that the closing of the Merger Agreement was subject to the following condition: "The Bankruptcy Court shall have entered ... (i) the order ... approving [the Merger] Agreement ... and (ii) an order ... confirming the Plan of Reorganization ... and authorizing all of the transactions and agreements contemplated by [the Merger] Agreement." (B.D.I. 11873-1 at 85 (emphasis added) ). As a result, both the Merger Approval Order and the...