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In re McCook Metals

December 4, 2007

IN RE: MCCOOK METALS, L.L.C. AND MCCOOK EQUIPMENT, L.L.C., DEBTORS.
JOSEPH A. BALDI, AS CHAPTER 7 TRUSTEE OF MCCOOK METALS, L.L.C., PLAINTIFF,
v.
SAMUEL SON & CO., LIMITED AND SAMUEL SON, CHICAGO, LTD., DEFENDANTS.



The opinion of the court was delivered by: Judge Rebecca R. Pallmeyer

MEMORANDUM OPINION AND ORDER

Longview Aluminum, LLC ("Longview") voluntarily filed for bankruptcy in the United States Bankruptcy Court for the Northern District of Illinois in March 2003. In August 2003, William A. Brandt was appointed as trustee (the "Longview Trustee"). In September 2003, the Longview Trustee brought adversary proceedings against: (1) Samuel, Son & Co., Ltd. and Samuel, Son Chicago, Ltd. ("Samuel"); (2) Dynegy Marketing and Trade ("Dynegy"); and (3) Jenkens & Gilchrist, LLP ("Jenkens") (together, the "Defendants") to recover property transferred to Defendants between March 2001 and March 2002. The Trustee contends Longview was insolvent and undercapitalized at the time of these transfers and seeks recovery of the value of that transferred property, under sections 544, 548, and 550 of the Bankruptcy Code as well as sections 5 and 6 of the Illinois Uniform Fraudulent Transfer Act ("UFTA"). Following a bench trial, Bankruptcy Judge Eugene R. Wedoff concluded that Longview was neither insolvent nor undercapitalized between March 2001 and March 2002 and dismissed the Trustee's claims. The Longview Trustee appeals. For the reasons explained below, this court affirms the Bankruptcy Court's holding.

BACKGROUND

The Longview bankruptcy case is related to the McCook Metals, LLC ("McCook") bankruptcy proceedings. McCook was controlled by Michigan Avenue Partners, LLC ("MAP"), thesame company that formed Longview. In re Longview Aluminum, L.L.C., Nos. 03 B 12184, 04 A 01051, 04 A 00276, 04 A 00279, 2005 WL 3021173, at *1 (Bankr. N.D. Ill. July 14, 2005). This court will not repeat in full the factual explanation contained in In re Longview, 2005 WL 3021173 and In re McCook Metals, L.L.C., 319 B.R. 570 (Bankr. N.D. Ill. 2005), but a summary of Judge Wedoff's factual findings will be useful on this appeal.*fn1

In 1941, Reynolds Metal Co. ("Reynolds") built the Longview smelter, an aluminum smelter located along the Columbia River in Longview, Washington. (Longview Aluminum, LLC Trustee's Opening Memorandum on Appeal ("Opening Mem.") at 5.) The Longview smelter produced various types of aluminum ingot. In re Longview, 2005 WL 3021173, at *3. It consisted of a south plant, built in 1941, and a north plant, built in 1966, each of which had three production lines, a cast house, and ancillary facilities; the north plant also had additional features. Id. MAP formed Longview in November 2000, to purchase the Longview smelter. Id. at *1.

In 1999, Alcoa, Inc. ("Alcoa") merged with Reynolds. In re Longview, 2005 WL 3021173, at *2. Several competitors, including MAP, filed antitrust complaints in connection with this merger, and the European Commission ultimately ordered Alcoa--the post-merger entity--to divest at least 25% of the Longview smelter and Reynolds' alumina refinery. Id.*fn2 In the fall of 2000, MAP negotiated with Alcoa an asset purchase agreement, by which Longview would purchase 100% of the smelter assets for $140 million. Id. Longview obtained the rights to operate and own smelter equipment, inventory, and raw materials, as well as a 99-year lease of the land on which the smelter was located. Id. at *1. Longview's largest operating expenses were anticipated to be alumina, electric power, and the union workforce, and MAP negotiated contracts related to each. Id. at *2. In particular, MAP executed an alumina supply agreement, by which Longview agreed to purchase 120,000 metric tons of alumina from Reynolds by the end of 2002. Id. Longview also assumed an electric power contract, referred to as the Block Power Sales Agreement, with the Bonneville Power Administration ("BPA"), a federal agency, running from October 1, 2001 through September 30, 2006. Id. at *2.

Around the same time, faced with unprecedented energy demands created by the California energy crisis, the BPA offered to repurchase the allocated electrical energy of certain aluminum smelters willing to temporarily curtail operations. (Opening Mem. at 6.) MAP negotiated a Curtailment Agreement for Longview, in which the BPA agreed to pay Longview $226 million to curtail its use of electric power and cease operations at the smelter between February 26, 2001, and June 30, 2002 (the "curtailment period"). In re Longview, 2005 WL 3021173, at *2. In conjunction with the Curtailment Agreement, Longview took on certain liabilities. First, as Longview intended to fully resume operations at the smelter in July 2002, MAP agreed that Longview would begin to take a reduced level of power from the BPA on April 1, 2002. Id. at *2 n.3. Second, until operations resumed, MAP agreed that Longview would pay "normal wages and benefits to union employees." Id. at *2.*fn3 Third, MAP agreed with the United Steelworkers of America that MAP would: begin construction on a power generator by July 1, 2001; make an equity investment of up to $36 million to build the power generator if financing was otherwise unavailable; and grant the unions a minimum $50 million security interest in the smelter by September 20, 2001. Id.; see also Opening Mem. at 7.*fn4

During the curtailment period, MAP caused Longview to make payments to certain creditors of MAP, Longview, and other MAP-controlled entities. In re Longview, 2005 WL 3021173, at *4. Of particular relevance are the payments Longview made to the Defendants: (1) Sixteen payments to Samuel totaling $2,216,125 between June 2001 and March 2002, which repaid a $2.5 million royalty advance Samuel extended in connection with its purchase of a distribution business from another entity controlled by MAP's principals; (2) A payment of $369,400 to Dynegy on July 26, 2001 for natural gas delivered to McCook in May 2001; and (3) Eight payments to Jenkens totaling $762,687.46 between March 2001 and February 2002 for legal services provided to MAP, McCook, and Longview. Id. Together, these payments are the disputed transfers the Longview Trustee seeks to avoid.

According to Longview's vice chairman, John Kolleng, the company "fully intended and expected to restart" operations at the smelter in April 2002. In re Longview, 2005 WL 3021173, at *3. Longview's plant manager, Louis Locke, also testified that Longview planned to resume operations in the north plant. Id. But following the curtailment period, Longview's plans to re-open the smelter fell through. Id. The cost of electric power was high and the global price of aluminum was low in April 2002. Id. Thus, "[b]y April 2002, the aluminum industry in the Pacific Northwest was essentially non-operational." Id. On March 4, 2003, Longview filed a voluntary Chapter 11 Bankruptcy petition, and Judge Wedoff approved Brandt's appointment as the Longview Trustee five months later.

The Trustee brought adversary proceedings against Samuel, Dynegy, and Jenkens, which were consolidated before Judge Wedoff. In these proceedings, the Longview Trustee seeks to recover the disputed transfers from Longview to the Defendants, pursuant to federal bankruptcy law (11 U.S.C. §§ 548 & 550) and Illinois state law (11 U.S.C. § 544 and 740 ILCS 160/5-6 & 10). Judge Wedoff concluded that the Trustee is not entitled to recover the value of the disputed transfers, In re Longview, 2005 WL 3021173, at *12, and the Longview Trustee appeals.*fn5

DISCUSSION

I. Jurisdiction

The Longview Trustee has appealed from Judge Wedoff's final judgment, In re Longview 2005 WL 3021173. The court has jurisdiction over this appeal from the final judgments entered in favor of each Defendant on all counts pursuant to 28 U.S.C. § 158.

II. Insolvency

A. The Legal Standard

The Longview Trustee contends, first, that the disputed transfers are void due to Longview's insolvency. (Opening Mem. at 11-13.) The Bankruptcy Code provides that a trustee may avoid a debtor's transfer made on or within one year before the date of the filing of the petition if the debtor "received less than a reasonably equivalent value in exchange for such transfer" and "was insolvent on the date that such transfer was made." 11 U.S.C. § 548(a)(1).*fn6 The Longview Trustee also contends that Longview property was transferred in violation of section 6 of the UFTA. (Opening Mem. at 12.) A trustee may avoid a debtor's transfer, if that transfer is "voidable under applicable law by a creditor holding an unsecured claim." 11 U.S.C. § 544(b); Leibowitz v. Parkway Bank & Trust Co. (In re Image Worldwide), 139 F.3d 574, 576-77 (7th Cir. 1998) ("under the strong-arm provision of the Bankruptcy Code, 11 U.S.C. § 544(b), the trustee can avoid any transaction of the debtor that would be voidable by any actual unsecured creditor under state law"). The substantive provision of the UFTA is nearly identical to § 548 of the Bankruptcy Code: under the UFTA, a debtor's transfer is fraudulent as to a creditor if the debtor did not receive "a reasonably equivalent value in exchange for the transfer" and the debtor "was insolvent at that time." 740 ILCS 160/6(a).*fn7 Under either section 544 or 548, the Trustee, if he can establish that a transfer is voidable, is entitled to recover the value of the property transferred. 11 U.S.C. § 550(a).

Thus, the Longview Trustee may recover the value of a disputed transfer if: (1) The property transferred belonged to Longview; (2) Longview did not receive a reasonably equivalent value in exchange for the transfer; and (3) Longview was insolvent at the time of the transfer. See 11 U.S.C. §§ 544(b), 548(a)(1), 550(a); 740 ILCS 160/6(a). In this appeal, the only contested issue is whether Longview was insolvent between February 26, 2001 and April 1, 2002, the time of the disputed transfers. (See Opening Mem. at 2-3.)*fn8 Under the Bankruptcy Code, an entity is insolvent if it is in a "financial condition such that the sum of such entity's debts is greater than all of such entity's property, at a fair valuation . . . ." 11 U.S.C. § 101(32)(A). Likewise, the UFTA provides that "[a] debtor is insolvent if the sum of the debtor's debts is greater than all of the debtor's assets at a fair valuation." 740 ILCS 160/3(a). In other words, "balance-sheet solvency determines whether the payments to creditors in the present case were voidable preferences." In re Taxman Clothing Co., 905 F.2d 166, 170 (7th Cir. 1990).

The Longview Trustee bore the burden of persuading the trier of fact that Longview was insolvent on those dates. In re Taxman, 905 F.2d at 168.*fn9 To meet its burden of persuasion, the Longview Trustee must prove Longview's insolvency by a preponderance of the evidence. Doctors Hosp. of Hyde Park, Inc. v. Desnick (In re Doctors Hosp. of Hyde Park, Inc.), 360 B.R. 787, 853 (Bankr. N.D. Ill. 2007); see also Grogan v. Garner, 498 U.S. 279, 286 (1991) ("Because the preponderance-of-the-evidence standard results in a roughly equal allocation of the risk of error between litigants, we presume that this standard is applicable in civil ...


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