On June 18, 2010 the U.S. Bankruptcy Court in Delaware authorized the Official Committee of Unsecured Creditors to commence preference actions against creditors of Crucible Materials Corporation (District of Delaware Case No. 09-11582 (MFW)). The system that allows the Committee to sue its own constituents derives from one of the basic tenets of U.S. bankruptcy law… equal treatment among creditors of the same class. For those who will be targeted by these preference claims, the hope is that at least some of the returned money will find its way back in the form of increased distributions to the unsecured creditors. Unfortunately, in all probability, the Committee is suing its own constituents to recover funds under circumstances where none of the recovery will ever be paid to unsecured creditors.
Litigating for the “Greater Good”
In the near future, the Official Committee of Unsecured Creditors (“Committee”) will begin suing its own constituents – specifically, creditors who did business with Crucible prior to its seeking bankruptcy protection. Creditors who can expect to be targeted include suppliers who received payments on account from and including February 5, 2009 to May 6, 2009.
None of this comes as a surprise, because late last year the Committee employed a preference-recovery specialist, A*S*K Financial, to analyze the potential recovery that could be expected if avoidance actions were to be litigated, and to be ready to implement the recovery process. The time has come.
The fundamental premise of bankruptcy preference law is to equalize the treatment of creditors who were preferred over others in the 90 days leading up to bankruptcy. It calls for an adjustment to be made between creditors who were “preferred” with payments, on the one hand, and creditors who received a lesser percentage of what they were owed on the other hand.
Theory, Reality and the Empty Pot
The “Greater Good” cannot be realized, and the theory of equality of distribution cannot be carried out if, after it’s all said and done, the pot to be shared by the class of creditors primarily targeted by bankruptcy preference claims turns up empty. And that happens all the time because U.S. bankruptcy law not only establishes various classes of creditors and the respective pots to which they may look for payment, it also prioritizes the way funds are allocated to each pot and paid from it.
The same bankruptcy code that authorizes litigating for the “greater good” also sets up and enforces very unequal treatment among classes of creditors. And here is where the lofty aspiration of equal treatment of creditors runs into a reality check. In effect, the bankruptcy code requires that certain pots be full (i.e the creditors sharing that pot get fully repaid) before any money flows to the next pot.
Pension Claims v. Environmental Claims; The Clash of the Titans and the End of “Litigating for the Greater Good”
Classes of creditors entitled to priority of payment under the debtors’ plan of reorganization include the Pension Benefit Guaranty Corporation (“PBGC”) and agencies with claims for environmental clean up costs. PBGC has also objected to confirmation of Crucible’s plan of reorganization. Lastly, PBGC is also taking an active role in the debtors’ claims process, joining the debtors in some of their objections to competing environmental claims.
The hearing on plan confirmation was originally scheduled for May 27, 2010; it was postponed to June 22, 2010 (to allow debtor time to resolve pension and environmental claims), and it has been postponed again to August 7, 2010. With the PBGC claiming rights to be paid administrative expenses far in excess of those budgeted in Crucible’s plan of reorganization, and the PBGC’s efforts to defeat competing environmental agency claims, Crucible’s bankruptcy proceeding is exhibiting clear signs of a case where the general unsecured creditors will be left with nothing.