In re Fansteel Foundry Corp.

In the Matter of: Fansteel Foundry Corporation Debtor

Case No. 16-01825-als11

UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF IOWA

October 26, 2018

MEMORANDUM OF DECISION

On July 27, 2018 the Court held a hearing on the Debtor's combined Disclosure Statement and Plan that was jointly proposed by Fansteel Foundry Corporation and the Official Committee of Unsecured Creditors (OCC) (docket numbers 758, 759, 766, 804) (hereinafter "Plan"). The Court has jurisdiction pursuant to 11 U.S.C. sections 157 and 1334. For the reasons that follow 510's objections to the Disclosure Statement and Plan are overruled and the Plan is confirmed.

BACKGROUND

Fansteel Foundry Corporation, and its related companies, engaged in specialized work involving the casting and fabrication of parts for the aerospace and defense industries. The genesis of the disputes before the Court are rooted in transactions that occurred prior to the voluntary chapter 11 petitions filed in the Southern District of Iowa. A timeline of events¹ is useful in framing the issues surrounding Plan confirmation.

In 2002 Fansteel Foundry Corporation (Fansteel 1) filed a petition under Chapter 11 in Delaware which was jointly administered with other of its affiliates. A Second Amended Consolidated Plan was confirmed in mid-November 2003. Based upon agreed plan treatment the reorganized entity, Fansteel, Inc. (Fansteel 2) issued a $9.5 million Note in favor of the Pension Benefit Guaranty Corp. (PBGC) payable in a series of installments. The assets of Fansteel de Mexico provided collateral for that Note.

The Fansteel 1 bankruptcy also included claims held by the Nuclear Regulatory Commission (NRC) involving real estate located in the State of Oklahoma. Fansteel 2 was released from any environmental liability in Oklahoma by the transfer of its ownership in the Muskogee real estate to FMRI, Inc. which would then be responsible for remediation costs.² Wellman Dynamics Corporation (WDC) also provided additional financial assurance for FMRI's obligation by way of an irrevocable standby letter of credit.

Fifth Third Bank (Bank) began extending credit to Fansteel 2 and its affiliates in July 2005.

In December 2009, when Fansteel 2 was in default on its obligation to PBGC, 510 Ocean Drive Debt Acquisition LLC (510) purchased PBGC's interest in the note and collateral pledge for an amount far less than the outstanding balance.

In January 2014 Fansteel 2 and 510 entered into a forbearance agreement related to the former PBGC Note. At that same time WDC and Wellman Dynamics Machinery & Assembly (WDMA) provided guaranties and pledged collateral to 510. Approximately two months later 510 obtained a security interest in Fansteel 2's collateral and a mortgage against WDC's real estate in Creston, Iowa. The way in which these transfers were facilitated placed an insider on all sides of the transactions.³

In September 2015 the Bank and 510 executed a subordination agreement. At that same time WDC had a $1 million delinquency owing to its retirement plan. Because of that obligation PBGC held a 430(k) lien that the Bank also wanted subordinated to its debt which resulted in 510 transferring its interest in the Note back to the PBGC pursuant to a Collateral Assignment of Note, Mortgage and Pledge Agreement.

By July 2016 the Bank was owed approximately $30 million under its credit facilities which were in default. The following month the Bank sold its notes, as well as any interests it held under the loans, to TCTM Financial LLC (TCTM).

On September 13, 2016 Fansteel 2, WDC and WDMA⁴ filed voluntary chapter 11 petitions (collectively "Debtors").⁵

Post-filing the Debtors and TCTM, their then current senior secured lender, became immediately entrenched on issues involving the use of cash collateral and adequate protection. After multiple hearings a final order for use of cash collateral was approved and TCTM's claim was determined to be over-secured entitling it to augment its claim under 11 U.S.C. §506(b).

In January 2017 the Debtors filed a joint plan of reorganization. Implementation of that plan was dependent upon establishing a lending relationship with a bank and 510's contribution of new value in the amount of $7 million. The plan also included an assignment to 510 of any potential claims held by the Debtors against Terra Mar, Inc., an entity affiliated with TCTM. Numerous objections were filed. 510 was given a period of time to demonstrate its commitment to funding. For a variety of reasons, 510 declined to deposit any funds to be held in escrow. Following this, the ability to obtain bank financing grew more uncertain because the collateral value was insufficient to support the requested loan amount. Lacking feasibility this plan was abandoned.

Work toward a 363 sale of WDMA assets then began. TCTM served as the stalking horse bidder. An auction was held, and the sale was approved to a third-party bidder.⁶

Over the course of the Debtors' bankruptcy cases there were multiple filings, disputes and stipulations among the parties involving the claims made by NRC. Two additional discoveries involving environmental liabilities further complicated the ability to move the Fansteel 2 and WDC cases forward: 1) the deed transferring the Muskogee site did not include the legal description for the contaminated portion of the real estate which remained in Fansteel's name; and 2) the Creston site owned by WDC was also the subject of extensive environmental issues which had not previously been addressed.

In July 2017, the OCC asked the Court to appoint a mediator. This request was prompted in part by promises between the parties that were not honored and was undertaken to facilitate resolution with major stakeholders. All parties were supportive of this process. Due to the diligent efforts of many constituencies the mediation was successful and a negotiated resolution was crafted for treatment of the NRC claims which would provide potential buyers with certainty about these obligations. The time frame for the mediation process was extended on several occasions to promote negotiation on other issues as the case progressed. Although 510 initially supported mediation it did not actively participate in the process.

TCTM submitted an Asset Purchase Agreement (APA) to serve as the stalking horse bid for the sale of WDC's assets which was attached to a sale motion filed in July 2017. Several months later, before the bidding procedures and APA were finally approved, an unexecuted Memorandum of Understanding of Key Terms of Settlement Agreement (MOU)⁷ was filed with the Court under seal. The contents of the MOU included specific terms that would govern the parties' intentions involving the terms of the APA, bid procedures, sale order, the plan and any order confirming it.⁸ Other than the request to seal, this document was never the subject of a motion requiring any Court action. The filing was unsealed by the Court after 510 raised questions about the contents of the MOU at the time of the confirmation hearing.

TCTM was the successful bidder at the auction of WDC's assets. As reflected on the docket, and in the caption here, that Debtor is now known as Fansteel Foundry Corporation (FCC).

The instant Disclosure Statement and Plan were jointly filed by FCC and the OCC. The ballot report reflected that the votes received unanimously accepted the Plan and cram down was not requested. Gordian Group, LLC⁹ objected to the Plan's treatment of its potential administrative claim. At the conclusion of the confirmation hearing this objection was sustained. 510 objected to the Disclosure Statement and to the treatment of its claim under the Plan. Pending the submission of written closing arguments and additional briefing the objections filed on behalf of 510 were placed under advisement.

While considering confirmation of the Plan, the objections and relevant underlying documents the Court found that clarification was required on the status of 510's claim. Specifically, the Court was concerned as to whether 510 had standing as a claimholder or whether a debt existed to support its secured claim after the transfer of the Note to PBGC. The responses filed to the Court's inquiry all agreed that 510 holds a claim.

DISCUSSION

1. THE DISCLOSURE STATEMENT

Because the objections to the disclosure statement were not specifically addressed by the parties at the hearing the Court relies on the filed documents to determine whether the disclosure statement meets the standard for adequate information.

"The primary purpose of a disclosure statement is to give creditors the information they need to decide whether to accept the plan." In re Monnier Bros., 755 F.2d 1336, 1342 (8th Cir. 1985). To this end, the Bankruptcy Code defines adequate information to guide the contents of a disclosure statement:

"[A]equate information" means information of a kind, and in sufficient detail as far as is reasonably practicable in light of the nature an history of the debtor and the conditions of the debtor's books and records, including a discussion of potential material Federal tax consequences of the plan to the debtor, any successor to the debtor, and a hypothetical investor typical of the holders of claims or interest in the case, that would enable such a hypothetical investor of the relevant class to make an informed judgment about the plan . . . the court shall consider the complexity of the case, the benefit of additional information to creditors and other parties in interest, and the cost of providing additional information.

11 U.S.C.A. § 1125(a)(1). Adequate information is not a static or rigid term. Instead, the concept is intended to be tailored to suit individual cases.

Precisely what constitutes adequate information in any particular instance will develop on a case by case basis. Courts will take a practical approach as to what is necessary under the circumstances of each case, such as the costs of preparation of the

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