The Official Committee of Unsecured Creditors appointed in the Crucible Materials Corporation bankruptcy (District of Delaware Case No. 09-11582 (MFW)) filed a motion on June 3, 2010 seeking intermediate derivative standing to pursue avoidance actions aka bankruptcy preference recovery.  The Committee acknowledges that avoidance actions are supposed to be handled by a Litigation Trustee of a Litigation Trust to be established upon confirmation of Debtor’s Amended Chapter 11 Plan of Liquidation (the “Plan”).  The Committee also acknowledges that the Litigation Trustee is to begin pursuing avoidance actions on the Plan effective date.  With a confirmation hearing scheduled for June 22, 2010, why is the Committee so hot to start the preference actions?

The Committee’s Position –Time’s Awastin’, the Future is Uncertain and We’re Running Out of Things to Do

It comes as no surprise that some of Crucible’s suppliers are being targeted to help fund this Plan through their payment of preference liabilities.  The Committee has been pushing the preference recovery process forward for several months.  Late last year, on the Committee’s motion, the court authorized the Committee to employ A*S*K Financial, a true preference recovery machine, to analyze and litigate avoidance actions.

It is a surprise, however, that the Committee wants authorization to initiate a head start on the recovery process in a motion that is scheduled to be heard on the same day as the hearing on confirmation.  With the Plan calling for the preference claims to be brought by the Litigation Trustee on the Plan’s effective date, it would seem on the face of things that granting the Committee’s request would introduce inefficiencies by requiring a hand off of the preference actions soon after the process had begun.  Indeed, the Committee seems to anticipate such obvious concerns with a statement in its motion that “[t]he Litigation Trust and Litigation Trustee are principally comprised of Committee members and repr[e]sentatives.”  Say what?

At the core of the Committee’s motion is uncertainty about confirmation of the Plan.  Originally, the confirmation hearing was scheduled for May 27, 2010 “but was continued to allow for the Debtors and the Pension Benefit Guaranty Corporation to discuss a resolution of the pending Plan objection and to enable the Debtors to resolve certain environmental remediation claims.”  Ok… in bankruptcy, uncertainty is certain, but the Crucible case was filed on May 6, 2009, there is no problem with a preference action statute of limitations date looming in the near future…. why the rush?

What is Going On?

A review of the (third amended) disclosure statement makes it clear that preference recoveries were always expected to help fund the Plan.  And a review of the objection of the Pension Benefit Guaranty Corporation (“PBGC”) to confirmation gives grave new meaning to the Committee’s request.  The PBGC’s objection observes that Crucible sponsored six pension plans, providing retirement benefits to approximately 3501 persons.  The objection further states that the plans have been terminated without sufficient assets to pay promised benefits and, by law, the plans have been taken over by the PBGC, triggering $200 million in Debtor liabilities owing to the PBGC for unfunded benefit liabilities, unpaid minimum funding liabilities, priority claims, administrative expense claims, unpaid premiums and general unsecured claims.

Concluding that the Plan “cannot be confirmed because it seeks to take actions that violate the Bankruptcy Code,” the PBGC says “…for the last two months, the parties have been negotiating in good faith to reach a consensual resolution… [but] the parties have not yet reached an agreement.”  The PBGC’s priority claims and administrative expense claims are measured in the millions, yet the disclosure statement estimates that the total of all administrative claims and priority claims is less than a million.  It seems unlikely the parties will be reaching any agreements any time soon.

It thus appears that PBGC is the 800-pound gorilla staring down the Debtor and standing in the way of confirmation of the Plan.  And if that’s so, isn’t PBGC also the elephant that has been in Debtor’s living room since the day the case was filed?  Isn’t this a case of woeful administrative insolvency?
The delay in Plan confirmation has resulted in an unnecessary and wasteful cash burn, and it looks like the Committee feels the heat.  Starting the recovery process sooner rather than later will do one of two things.  It will either: (1) shorten the period from Plan confirmation to discharge and help offset the pre-confirmation cash burn; or (2) provide a head start for the eventual hand-off to a trustee…. to the Litigation Trustee, or, perhaps, to a Chapter 7 trustee.

The Next Shoe to Drop

The Debtor has consented to the Committee’s head start on preference actions.  The motion is not likely to draw objections and, regardless of whether or not the Plan is confirmed at the June 22nd hearing, it seems likely the Committee’s motion will be granted and preference-defendant creditors will be called upon to shoulder another  burden of bankruptcy… , in this case, the cost of the bankruptcy proceeding itself.