Case Doc 2020 Filed 02/10/14 Entered 02/10/14 16:13:24 Desc Main Document Page 1 of 8

Transcription

1 Document Page 1 of 8 UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION ) In re: ) ) EDISON MISSION ENERGY, et al., ) ) Case No (JPC) Debtors. ) Chapter 11 ) OBJECTION OF THE U.S. SECURITIES AND EXCHANGE COMMISSION TO CONFIRMATION OF DEBTORS JOINT SECOND AMENDED PLAN The United States Securities and Exchange Commission ( SEC or Commission ), a statutory party to these proceedings 1/ and the federal agency responsible for regulating and enforcing compliance with the federal securities laws, objects to confirmation of the Second Amended Joint Chapter 11 Plan of Reorganization ( Plan ) filed by Edison Mission Energy ( EME ) and its affiliates (collectively, the Debtors ), on the grounds that the Plan improperly provides a discharge to the liquidating Debtors in violation of Section 1141(d)(3) of the Bankruptcy Code. In support of its objection, the Commission respectfully states as follows: 2 / I. INTRODUCTION EME is an SEC- reporting company seeking confirmation of a Plan that provides for the sale of substantially all of its assets to a third party purchaser. Upon the effective date of the Plan ( Effective Date ), the reorganized EME will have no business operations and its only 1/ As a statutory party in corporate reorganization proceedings, the Commission acts as a special advisor to the courts. When the Commission appears in its special advisory role under Section 1009(a) of the Bankruptcy Code, it may raise and may appear and be heard on any issue but may not appeal from any judgment, order, or decree entered in the case. 11 U.S.C. 1109(a). 2 / At the request of the Debtors, the Commission delayed filing its Objection until February 10, 2014 in order to allow the Debtors additional time to address the Commission s concerns. As of this date, the Commission s concerns have not been resolved, although the Commission anticipates continuing discussions with the Debtors.

2 Document Page 2 of 8 remaining assets will be litigation claims, tax attributes, and the assets of three related subsidiaries that are in wind-down. Nonetheless, the Plan seeks to effect a discharge of the debts of EME and its subsidiaries. Such a discharge would violate Section 1141(d)(3) of the Bankruptcy Code, which prohibits the discharge of corporate debtors that have no ongoing business operations. As more fully explained below, the prohibition contained in Section 1141(d)(3) is intended to prevent trafficking in corporate shells. Consistent with its directive to prevent securities fraud and protect investors, the Commission has recognized and sought to curb abuses of the federal securities laws involving shell companies. The Commission therefore has an interest in bankruptcy cases where a liquidating or liquidated public company debtor, with no continuing regular business operations, proposes a plan of reorganization which discharges the debtor and provides for the continued existence of its corporate shell through the issuance of new common stock to creditors or shareholders. Such a public shell, released of its liabilities, can be marketed to private companies that wish to go public via a reverse merger without having to comply with the registration requirements of the federal securities laws. Although the Plan here does not expressly provide for such a transaction, the possibility exists so long as the Plan improperly grants the Debtors a discharge. II. BACKGROUND EME is a reporting company whose common stock is registered with the Commission under Section 12(g) of the Exchange Act of / On December 17, 2012, the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. Allowed unsecured claims against EME include an estimated $3.853 billion in senior notes ( Senior Notes ). 3/ EME s shares are wholly owned by its parent company, Edison International ( EIX ), which is not in bankruptcy. 2

3 Document Page 3 of 8 Disclosure Statement at 6, n.3. On December 17, 2013, the Debtors filed the Plan and Second Amended Disclosure Statement ( Disclosure Statement ). Generally, the Plan provides for the sale of substantially all of the Debtors assets to NRG Energy, Inc. ( NRG ) for $2.635 billion, comprised of $2.285 billion in cash and $350 million in NRG common stock ( Sale Proceeds ). Disclosure Statement at 1. Under the Plan, unsecured creditors will receive a pro rata share of the net Sale Proceeds and shares of new common stock in the reorganized EME ( New Interests ), for an anticipated recovery of 57.9% - 100%. Disclosure Statement at 6. The New Interests will be issued in reliance upon the registration exemption provided in Section 1145 of the Bankruptcy Code. Plan at 31. EIX s existing equity interests in EME will be cancelled. As of the Effective Date, EME will have liquidated substantially all of its assets through the sale to NRG. Its only remaining assets will be assets excluded from the sale which appear to consist primarily of causes of action against EIX and other claims, tax attributes such as net operating losses, and the assets of three non-operating subsidiaries, the Homer City Debtors, which are in wind-down ( Excluded Assets ). See Executed Purchase Agreement at 4-6 ( Excluded Assets ), Exhibit E of Plan Supplement; Disclosure Statement at 44. In addition, the only activity to be conducted by the reorganized EME under the Plan is engaging in the process of liquidat[ing], settl[ing], compromis[ing], or resolv[ing] matters involving the Excluded Assets. See Plan at 13 ( Post-Effective Date EME Matters ). Thus, it appears that the reorganized EME will not be engaged in business upon the Effective Date, but rather will be continuing the process of further liquidating assets which are not part of the sale to NRG. Even though it is clear that EME and its subsidiaries will have disposed of their businesses upon the Effective Date, the Plan grants the Debtors a full discharge. Plan at 45. 3

4 Document Page 4 of 8 Such discharge provisions violate Section 1141(d)(3) of the Bankruptcy Code, which prohibits liquidating corporate debtors with no future business operations from receiving a discharge, and hence render the Plan unconfirmable under Section 1129(a)(1) of the Bankruptcy Code, which provides that a plan shall be confirmed only if it complies with all applicable provisions of Chapter U.S.C. 1141(d)(3); 1129(a)(1). II. DISCUSSION The Plan Violates the Prohibition Against Discharge Contained In Section 1141(d)(3). Upon the Effective Date, EME and its subsidiaries will have sold their business operations and it appears their only remaining activity will be to conduct litigation, in particular with respect to the Debtors claims against EIX ( EIX Litigation Claims ). 4/ Instead of creating a liquidating trust or some other mechanism for keeping the corporation alive for purposes of pursuing causes of action, the Plan proposes that the Debtors receive a discharge and that shares of new common stock in the reorganized EME be issued to creditors. Granting a discharge to these liquidating debtors, however, would be contrary to the Bankruptcy Code and underlying public policy. Section 1141(d)(3) of the Bankruptcy Code provides: (3) The confirmation of a plan does not discharge a debtor if (A) the plan provides for the liquidation of all or substantially all of the property of the estate; (B) the debtor does not engage in business after consummation of the plan; and (C) the debtor would be denied a discharge under section 727(a) of this title if the case were a case under chapter 7 of this title. 4/ The Disclosure Statement indicates that the low estimate (57.9%) of the anticipated recovery for unsecured creditors assumes no recovery on account of the EIX Litigation Claims, while the high estimate (100%) of the anticipated recovery for unsecured creditors assumes that EME successfully prosecutes or resolves and collects on all the EIX Litigation Claims in amounts sufficient to pay all unsecured creditors of EME in full. Disclosure Statement at 8, notes 5 & 6. 4

5 Document Page 5 of 8 11 U.S.C. 1141(d)(3). Section 727(a)(1) of the Bankruptcy Code provides that a debtor that is not an individual is not entitled to a discharge in a Chapter 7 bankruptcy case. 11 U.S.C. 727(a)(1). The policy of providing corporate debtors a fresh start through the discharge of their debts after successful emergence from Chapter 11 as a going concern is inapplicable to a debtor that sells substantially all of its assets during the pendency of the case and terminates operations. There is no need for a fresh start where there is no business to reorganize or employment to preserve. Accordingly, courts uniformly have found that a Chapter 11 liquidating corporate debtor does not receive a discharge. See e.g., In re Fairchild Aircraft Corp., 128 B.R. 976, 982 (Bankr. W.D. Tex. 1991); In re Wood Family Interests, Ltd., 135 B.R. 407, 410 (Bankr. D. Colo. 1989)( [U]nder Section 1141(d)(3), a corporate or partnership debtor that is both liquidating and discontinuing its business does not receive a discharge when its plan is confirmed ); Teamsters Pension Trust Fund v. Malone Realty Co., 82 B.R. 346, 349 (E.D. Pa. 1988). Congress designed Section 1141(d)(3) to discourage trafficking in corporate shells in liquidating Chapter 11 cases. See H.R. Rep. No. 595, 95 th Cong., 1 st Sess. 384, (1977); S. Rep. No. 989, 95 th Cong., 2d Sess , (1978). Accord In re Goodman, 873 F. 2d 598, 602 (2d Cir. 1989)( Congress deliberately excluded corporations from eligibility for discharge under Chapter 7 to avoid trafficking in corporate shells. ). Denying a liquidating corporate debtor a discharge restricts the manipulative use of bankruptcy shells in violation of securities laws and other legislation protecting public investors in and creditors of corporations. Report of the Commission on Bankruptcy Laws of the United States, H.R. Doc. No , 93 rd Cong., 1st Sess. (1973), reprinted in Collier On Bankruptcy, Appendix Volume B at App. Pt through App. Pt (15th rev. ed. 2002). The denial of a discharge operates to prevent trafficking in corporate shells by eliminating 5

6 Document Page 6 of 8 the economic incentive to use the shell. In Fairchild Aircraft, the court explained that Section 1141(d)(3) achieves the Congressional goal of discouraging trading in corporate shells by freighting the shell with all the claims, so that any claims or portions of claims not paid by the liquidation will attach to the shell, making the shell much less attractive for use in starting up another enterprise. Fairchild Aircraft, 128 B.R. at 982. The protection Section 1141(d)(3) affords against trafficking in corporate shells is particularly important with respect to publicly held companies: Without [this restriction], entities would be tempted to pick up the shell, issue new stock, and start a new business without the dead weight of old debt, undermining not only the integrity and bona fides of the bankruptcy system but also the underlying salutary function of the securities laws. Fairchild Aircraft, 128 B.R. at 982, n. 6. In particular, without Section 1141(d)(3), privately-held companies would be able to use the bankruptcy process to become publicly held via a reverse merger with the cleansed public shell, without undergoing registration under the Securities Act of 1933 ( Securities Act ) and making the full disclosure demanded by that statute. See generally15 U.S.C. 77a-77aa. The Plan here does not indicate that the reorganized EME intends to market its public shell; nevertheless, the possibility remains so long as EME is granted a discharge and creditors receive the New Interests pursuant to the registration exemption provided in Section 1145 of the Bankruptcy Code. 5/ Pursuant to Section 1145(c), the offering of the New Interests is deemed to be a public offering and, according to the Disclosure Statement, the New Interests may be resold without registration pursuant to Section 1145 (unless the holder is an underwriter under the Securities Act and the Bankruptcy Code). See 11 U.S.C. 1145(c); Disclosure Statement at 59. 5/ Even if the requirements of Section 1145 are technically satisfied with respect to the proposed issuance of New Interests to creditors, reliance on Section 1145 is a misuse of that provision. The purpose of Section 1145 is to facilitate the reorganization of real businesses, not to create a public shareholder base that would enable another venture to go public without undergoing the usual registration process. 6

7 Document Page 7 of 8 Thus, the effect of the Plan s discharge of EME, together with the creation of a public shareholder base through the issuance of the New Interests to creditors, will be to make EME s shell available to private entities as a vehicle to go public without registration. Securities issued by a non-operating company are highly speculative since there is very little information upon which to base an investment decision; the potential for fraud therefore is heightened whenever shares of a shell can be resold directly into the marketplace, or through intermediaries such as brokers, without a registration statement containing full and complete disclosure. 6/ Separate and apart from the Commission s policy concerns, the elements of Section 1141(d)(3) are plainly met here. The Plan provides for the sale of substantially all of the Debtors assets, and the Debtors will not be operating a business after the Effective Date but instead will be winding up the remains of its former business. EME therefore is not entitled to a fresh start afforded by a bankruptcy discharge. To the extent its liquidation does not pay its debts, it must remain burdened with them, in furtherance of the public policy underlying Section 1141(d)(3) discussed above. Since the Plan s discharge provisions are clearly contrary to Section 1141(d)(3), Section 1129(a)(1) prohibits confirmation of the Plan. IV. CONCLUSION WHEREFORE, for the reasons stated above, the Commission respectfully requests that the Court enter an order denying confirmation of the Plan. 6/ The Commission s concerns regarding shell companies are discussed in the proposing and adopting releases concerning revisions to Rules 144 and 145 of the Securities Act, which were adopted in 2008 to prohibit the use of Rule 144 for the resale of securities of a shell company. See SEC Release No at 45-51; (Dec. 7, 2007). Specifically, Rule 144(i) provides that Rule 144 is not generally available for the resale of securities initially issued by a reporting or non-reporting issuer that is, or previously was, a shell company, defined as being a company with no or nominal operations and no or nominal non-cash assets. 17 C.F.R (i) (2008). In addition, pursuant to the revisions to Rule 145, any party, other than the issuer, to a transaction involving a shell company who publicly offers or sells securities of the issuer acquired in connection with the transaction, will be deemed an underwriter. 17 C.F.R. 1145(c) (2008). Thus, the effect of Rule 144(i) is that persons, including creditors and shareholders, who receive stock in a reorganized shell company may not be able to sell their stock until a registration statement is filed and becomes effective under the Securities Act. 7

8 Document Page 8 of 8 Dated: Chicago, Illinois February 10, 2014 Sonia Chae Senior Attorney, Bankruptcy Attorney for the Securities and Exchange Commission 175 W. Jackson Blvd. Chicago, Illinois (312) (telephone) (312) (facsimile) 8