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Update: Enron Proposes a 30/70 Rule for Consolidat

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NEW YORK (–A lawyer for a collection of the trade creditors of Enron North America said that his best guess is that the marathon Enron bankruptcy litigation will continue through this year and that no decision will be made on a final plan until December or early 2004.

Distressed-debt hedge funds continue to pull on both sides of a tug-of-war in this litigation Previous HedgeWorld Story. Some, such as Angelo, Gordon & Co., purchased much of the debt of a crucial Enron subsidiary, Enron North America Corp., which is sometimes referred to as the parent corporation’s cash cow. Angelo Gordon’s interest is to prevent the consolidation of the different debtors–i.e. of Enron Corp. and Enron North America–thereby preventing the dilution of its share of the Enron North America cash flow. Other hedge funds, such as Racepoint Partners LP and Baupost Group LLC, are on the opposite side of this issue, owning Enron’s instruments and encouraging the consolidation of the debtors.

The lawyers for the hedge funds couldn’t be reached for comment, but the lawyer for the trade creditors’ group, Aaron R. Cahn of Carter, Ledyard & Milburn, said that the issue of consolidation remains an open one.

The debtors–Enron, Enron North America and all the affiliated entities involved in the original December 2001 filing–submitted their own proposed joint Chapter 11 plan and related disclosure statement to the bankruptcy court on July 11, 2003, a plan prepared by the debtors’ law firm, Weil, Gotshal & Manges LLP, New York.

A Good Day

“This is a good day in what has been a very complicated process,” said Enron’s Acting Chief Executive Stephen F. Cooper, in a statement at the time of that filing. “Having reached agreement with a broad base of our economic stakeholders, we can expedite this process and hopefully avoid lengthy bankruptcy maneuvering and the associated legal expenses.”

The disclosure statement detailed the (preliminary) estimated recovery percentages for more than 350 classes of creditors. Enron’s management expects that the unsecured creditors will receive between 5% and 75% of their claim, depending on which particular debtor the claim is against. On the crucial question of consolidation of Enron with Enron North America, the proposed plan splits the difference with a 70/30 formula. A holder of an allowed general unsecured claim will receive the sum of 30% of the distribution that creditor would receive if the debtors’ estates were substantively consolidated and 70% of the distribution that creditor would receive if the estates were not consolidated.

It’s not at all clear whether the court will approve of that plan.

Existing precedent requires that a bankruptcy court judge consider two questions before ordering consolidation: (i) whether creditors dealt with the entities as a single economic unit and did not rely on their separate identity in extending credit such that consolidation is fair from the vantage point of creditor expectations, taking into account any prejudice to certain creditors resulting from the consolidation, or (ii) whether the assets and liabilities of the entities in question are hopelessly entangled such that the process of untangling them would be so time-consuming and costly that it is not in the interest of the creditors to complete that process.

Enron’s management arrived at the 30/70 formula, according to its disclosure statement, after finding “relevant facts weighing both for and against substantive consolidation” under that two-part test.

Before the dispute over substantive consolidation could fully get underway, in spring 2002, there was a dispute over procedural consolidation. There a split-the-difference approach did prevail–Enron North America creditors got a separate examiner but failed in their effort to get a separate creditors committee. “The judge denied the motion [for a separate committee], but we were able to interact with the Enron North America examiner and make our concerns felt,” Mr. Cahn recalled.

He also said that the plan now before the court calls for something less than complete liquidation, i.e. “for there to be an Enron of some kind” to emerge from Chapter 11 protection.

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