In the Matter of FEDERATED DEPARTMENT STORES, INC., and Allied Stores Corporation, et al., Debtors

In the Matter of FEDERATED DEPARTMENT STORES, INC., and Allied Stores Corporation, et al., Debtors. No. 1-90-00130. United States Bankruptcy Court, S.D. Ohio, W.D. Oct. 12, 1990. Jones, Day, Reavis & Pogue, Cleveland, Ohio, for petitioner. [MAJORITY — J. VINCENT AUG, Jr., Bankruptcy Judge.] SUPPLEMENTAL ORDER REGARDING APPOINTMENT OF RETIRED NONUNION EMPLOYEES COMMITTEE J. VINCENT AUG, Jr., Bankruptcy Judge. On October 4, 1990 this Court authorized the appointment of an Official Retiree’s Committee, pursuant to § 1114 of the Bankruptcy Code, to serve as the authorized representative of the Debtors’ nonunion employees retired as of January 15, 1990, who are participants under Debtors’ retiree medical, dental and welfare benefit plans. (Doc.1976) The Court has yet to appoint the committee members. This supplemental order addresses the issue of whether the Debtor’s estate may reimburse the Committee’s administrative expenses in light of In re The George Worthington Co., 913 F.2d 316 (6th Cir. Sept. 12, 1990). In Worthington, the Court of Appeals refused to allow reimbursement of administrative expenses to an official creditors’ committee. The appellate court analyzed Bankruptcy Code § 503(b)(3)(D) and concluded that “[t]here is no explicit statutory basis for the payment of the administrative expenses of an official creditors’ committee ...” Id. at 326. However, the appellate court also held that, consistent with § 503(b)(3)(D), a creditor or unofficial committee making a substantial contribution may be reimbursed. Id. at 322. The Court of Appeals had no opportunity to decide whether a retirees’ committee, appointed pursuant to § 1114, is entitled to expenses. For the reasons stated below, this Court finds that Congress intended that a debt- or’s estate pay the expenses of a retirees’ committee created pursuant to § 1114. Congress enacted § 1114 to address “the needs of retirees within the context of the traditional structure of the Bankruptcy Code..” S.Rep. No. 119, 100th Cong. 2nd Sess. 2. Subsection (d) of § 1114 provides: The court, upon a motion by any party in interest, and after notice and a hearing, shall appoint a committee of retired employees if the debtor seeks to modify or not pay the retiree benefits or if the court otherwise determines that it is appropriate, to serve as the authorized representative, under this section, of those persons receiving any retiree benefits not covered by a collective bargaining agreement. Several theories emerge when the Code is examined to determine whether a retirees’ committee may be paid its expenses. First, § 503(b)(3)(D) provides that a bankruptcy court may allow as an administrative expense the actual, necessary expenses of committees “other than a committee appointed under Section 1102 of this title in making a substantial contribution in a case under Chapter 9 or 11 of this title ...” (emphasis added). A retirees’ committee is formed pursuant to § 1114, not § 1102, so one barrier is lifted. Section 503(b)(3)(D) also' allows payment to certain creditors. Id. at 13. But at the September 27, 1990 hearing on the Debtors’ motion for an order appointing the Official Retirees Committee, Debtors argued there is some question whether the retirees here are in fact creditors because the Debtor has retained the contractual right to modify their benefits. We do not decide that issue at this time because we think that expenses can be paid pursuant to another avenue. Second, the language of § 1114 creates a retirees’ committee to serve as the “authorized representative” of the retirees. The designation “authorized representative” sets a retirees’ committee apart from the categories addressed by the Court of Appeals in Worthington. The committee members not only have been given a special mission and a special title, but they also have been given extraordinary powers to modify benefits and to bind their members, pursuant to §§ 1114(b)(2) and 1114(e)(1)(B). Having considered the various theories, the Court concludes that the best course is to categorize a retirees’ committee as a distinct entity altogether. Rather than designate a retirees’ committee as an unofficial committee making a substantial contribution or to rely too heavily on a retiree committee being formed “other than” pursuant to § 1102, this Court finds the retirees committee to be an extraordinary committee created by the extraordinary legislation of § 1114. The legislative history of § 1114 supports the Court’s conclusion. As Judge Bodoh explained in the case of In re GF Corporation, 115 B.R. 579, 582 (Bankr.N.D.Ohio 1990), § 1114 was enacted in quick response to the bankruptcy filing of LTV Corporation on July 17, 1986: ... After filing its petition for relief under Chapter 11, LTV concluded that its obligations to provide prepetition benefits to retirees were pre-petition unsecured claims which could not be paid without a court order or confirmed plan. Therefore, LTV stopped all payments in connection with retiree benefits as of the date of filing.... This action left many retirees without health insurance, and Congress acted quickly to remedy this situation. On July 30, 1986, the Senate passed a bill which required LTV to reinstate benefits, and on the same day LTV applied for and received an order of the bankruptcy court permitting it to restore benefits for a six month period at an estimated cost of legislation requiring companies in Chapter 11 to continue to pay retiree benefits in order to give Congress an opportunity to consider the issues raised by the LTV filing. The result of those deliberations is § 1114. The Congressional Record includes impassioned speeches which chronicle the need to protect retiree health and life insurance benefits when companies go into bankruptcy. 134 Cong.Rec. H3,486-91 (May 23, 1988) (statement of Sen. Metzen-baum). In sum, it is clear that Congress intended § 1114 to provide for the appointment of qualified retirees to negotiate on behalf of their fellow retirees. Congress could not have intended to disqualify prospective committee members if they could not pay their expenses. At the very least the Court finds authority to award expenses to a retirees committee under the broad equitable powers § 105 grants to bankruptcy courts. This case is a national bankruptcy case involving significant expenses. Retirees who have communicated with the Court by letter are deeply concerned that the Court appoint committee members who will effectively represent the entire spectrum of affected retirees. A September 15, 1990 letter the Court received from Stern’s Inc. retiree Harold S. Share of Edison, N.J. expresses these concerns: ... Management will be represented and have the support and counsel of a large cadre of highly paid senior Legal, Financial and Employee Benefits executives and specialists from their Corporate offices and subsidiaries. Of course they will be supported by their law firms, public accountants and employee health benefit consultants. On the other hand, the Retirees represent approximately 6400 former employees and surviving spouses or dependents whose backgrounds are very diverse and who are geographically dispersed. I am concerned that an appropriate process can be devised which will select members of the Committee who will have the background, ability and the willingness to give the time and effort necessary to properly negotiate with the high-powered Management group_ As is evident, the Court’s appointment of qualified retirees to the committee is a serious matter which should not turn on which retirees can afford to pay their own expenses. Failure to pay the expenses of such a committee would emasculate the intent behind Congress’ enactment of § 1114. For the foregoing reasons, the Court finds that the Debtors’ estate is authorized to reimburse the expenses of the Official Retirees’ Committee. The Debtor further is directed to serve the following documents upon the 6400 persons who will be affected by any modifications to their benefit plans: a cover letter explaining the procedure for appointing members to the retirees’ committee (Exh.A); a questionnaire to be submitted by retirees interested in serving on the committee (Exh.B); the Court’s previous Order authorizing appointment of the retirees’ committee (Doc.1976); and a copy of this Order without duplicative copies of exhibits A and B (the cover letter and questionnaire). IT IS SO ORDERED. EXHIBIT A Federated Department Stores, Inc. Axxied Stores Corporation 7 W**i Sotzhtb Stbsbt CUfCDOFATX, Oazo 40808 (513) 579 - 7883 WARNCN N. ROTHMAN VICK PftCSIOKMT CONKNMTION, «CNSrtTS AMO MANMIMtNT OIVCLOMINT OCtObfif 12, 1990 To: Federated and Allied Retiree* Re: Medical and Dental Benefits As you know, on August 31, 1990, Federated Department Stores, Inc. ("Federated") and Allied Stores Corporation ("Allied”) filed a motion under section 1114 of the Bankruptcy Code, 11 U.S.C. S 1114, requesting the appointment of an authorized committee ("Committee") to represent former Federated and Allied employees who have retired prior to January 15, 1990 (the date Federated, Allied and their respective subsidiaries filed chapter 11 cases). A copy of the motion has previously been furnished to you. On September 27, 1990, the Bankruptcy Court approved the motion. A copy of the Court order is enclosed. A supplemental Court order, which allows the Committee's expenses to be paid, is also enclosed. Now that the motion has been granted, the Committee will be appointed by the Court pursuant to the procedures set forth in section 1114 of the Bankruptcy Code, 11 U.S.C. S 1114. Following the appointment of the Committee, it is anticipated that Federated and Allied will make a proposal to the Committee providing for the modification of the various retiree medical and dental plans in effect prior to January 15, 1990. Federated and Allied will make available such relevant information as is necessary for the Committee to evaluate their proposal. In addition, the committee will be able to retain a law firm and financial advisor to assist in evaluating the proposal. Representatives of Federated end Allied will meet with the Committee as appropriate in an attempt to achieve a mutually satisfactory agreement. In the event that the Committee and Federated and Allied cannot mutually agree, the Court can order modifications to any of the medical or dental plans after notice and hearing. AbiaIím & 9TKAUB, «asesan. HmvTbK BlOOKXXODALS'a, Aw Bqiboim, Muio. luwBi LAXAKTC.C» — wtOmo Kiev’s, hum. «mwma GoiMMin'a.NaiMM.I Tbs Boo* w — nrr n nu ~ w. JOBBAM MaBSB. Sieras. Me — ACSarw Maas BBOTVSBS/JoBDA» MASSB.Xuoa.Fu*xa* Si SKM 'ft, tatemas. Wav Jamwt Federated Department Stores, Inc. At tttti Stores Corporation October 12, 1990 .Page 2 Enclosed is a questionnaire. The purpose of this questionnaire is to obtain pertinent inforsation about any retiree interested in serving on the Committee. Such information will be helpful to the Court in assuring that the appointees to the Committee will represent fairly all Federated and Allied retirees. If you are interested in serving on the Committee, please complete the questionnaire and return it to: Warren N. Rothman, Vice President, Federated Department Stores, Inc., Allied Stores Corporation, 7 West Seventh Street, Cincinnati, Ohio 45202. Please return the questionnaire so that Federated and Allied receive it by November 2, 1990. Please note that if you are a survivincuiPOUBe of a deceased Federated or Allied retiree, vou are not eligible to be considered for appointment to the Committee: accordingly, vou do not need to complete the enclosed questionnaire. All appointees to the Committee will be notified as promptly as possible. Further information regarding the responsibilities of the Committee will also be given to the members of the Committee when notification of the appointments is made. Meanwhile, if you have any questions or desire additional information, please do not hesitate to contact me or the office of the division or organization from which you Enclosures EXHIBIT B RETIREE QUESTIONNAIRE The following is to be completed by any retiree interested in serving on the Committee as explained in the accompanying cover letter. Please mark "Not Applicable" wherever appropriate. Please feel free to attach additional paper if necessary in responding to any question. When completed, please sign and return directly to: Warren N. Rothman Federated Department Stores, Inc. Allied Stores Corporation 7 West Seventh Street Cincinnati, Ohio 45202