Enron, in a last fight, girds for battle to wrest billions in damages from Citi
By Jeffrey Ryser
1 November 2007
Platts Global Power Report
 
It will be the last thing it ever does. Enron, destined for liquidation, is preparing to battle Citigroup and Deutsche Bank in a court room in New York in April over billions of dollars the once high flying energy group believes the big Wall Street banks owe in damages for their involvement in the company’s collapse.
The case is also casting light on the distressed debt market.
 
Down to just a 40-person staff, what is now known as Enron Creditors Recovery Corp. is reaching back to allegations a bankruptcy court examiner made in June 2003, specifically that Citigroup had “actual knowledge” of “wrongful conduct” at Enron when it helped Enron executives design and implement a number of so-called special purpose entities.
 
Having repaid now $13.2 billion to its creditors, or roughly 36 cents on the dollar, Enron Creditors Recovery has nothing left to disburse. The upcoming trial is to be heard by Judge Arthur Gonzalez, the US Bankruptcy Judge for the Southern District of New York, who has been overseeing the bankruptcy case from its inception.
 
Enron is expected to argue that, due to the injury done to Enron, Citigroup should not be allowed to collect on any part of the approximately $5 billion of claims that are still pending in the company’s bankruptcy proceedings, nor should any financial group to whom Citigroup has sold or transferred portions of those claims to since the company entered bankruptcy on December 2, 2001.
 
Deutsche Bank should also have roughly $250 million in claims disallowed, Enron has argued in court documents. Enron has argued Deutsche Bank designed improper tax shelters that Enron executives implemented.
 
Furthermore, those who have been tending to the Enron estate intend to argue they want Citigroup to return $3.5 billion worth of payments Enron made to Citigroup to
terminate certain deals in the final days before the company declared bankruptcy on December 2, 2001. Enron Creditors Recovery says these payments constitute “preferences or fraudulent transfers.”
 
Finally, lawyers representing Enron Creditors Recovery are sure to ask a jury to consider damages. While a spokesman for the company would not say exactly how much in damages the lawyers will ask for, he speculates at least in the couple of billions of dollars.
 
All told, if Enron Creditors Recovery wins its case, and is awarded damages, the firm could receive as much as $5 to $6 billion from Citigroup and Deutsche Bank, and a reduction of more than $5 billion in claims.
 
The cases against the two banks are the remaining two “mega claims” that Enron filed in 2005 against 11 banks. Nine banks have settled: Royal Bank of Scotland, Royal Bank of Canada, Canadian Imperial Bank of Commerce, Toronto-Dominion Bank, JPMorgan Chase, Credit Suisse, Merrill Lynch, Fleet Bank, and Barclays.
 
Enron Creditors Recovery has received $1.7 billion in cash from these settlements to distribute to creditors. The settlements also included agreements that Enron would not pay $971 million in claims.
 
Enron’s suit against Citigroup stems from the Third Interim Report of Neal Batson, the Atlanta attorney who served as court appointed examiner in the bankruptcy case. Attached to that report was a 150-page Appendix D that chronicles Citigroup’s role in Enron’s collapse. Batson had subpoena power and he deposed hundreds of individuals inside and outside of Enron for what turned out to be three voluminous reports.
 
According to Batson, from 1997 through 2001, Enron used 30 banks in total, but Citigroup was one of Enron’s nine top tier banks, completing 60 transactions for Enron during that time period and generating $188 million in fees.
 
Batson said that Citgroup’s involvement in designing SPEs referred to as Nighthawk, Nahanni, Bachus and Sundance, as well as prepay transactions that were handled by SPEs Yosemite I through IV, enabled Enron to complete approximately $5.9 billion of financings. As a result of these financings, Enron improperly recorded, according to Batson, more than $5 billion of cash flows from operating activities, improperly recorded approximately $132 million of income, and understated the debt on its December 31, 2000 balance sheet by approximately $1.9 billion and on its June 30, 2001 balance sheet by approximately $2.7 billion.
 
Batson concluded in his report that Citigroup “had actual knowledge of the wrongful conduct” that he said “gave rise to breaches of fiduciary duty” by Enron executives, and that Citigroup gave “substantial assistance” to Enron executives “by participating in the transactions.” He said “injury to Enron” was “the direct or reasonably foreseeable result of this conduct.”  Batson said, as well, that he believed there was “sufficient evidence of inequitable conduct by Citigroup in connection with the Enron SPE transactions for a court to conclude that Citigroup’s claims should be equitably subordinated to the claims of other creditors.”
 
A recent decision by the US District Court for the Southern District of New York not to certify an appeal of two prior rulings by the US Bankruptcy Judge Gonzalez, has helped clear the way for the trial. When Enron filed for bankruptcy protection it owed $1.7 billion to a syndicate of lenders for funds advanced under a credit agreement. On February 22, 2002, Citibank transferred a $5 million claim under that credit agreement to Deutsche Bank, which turned around on May 15, 2002, and transferred it to Springfield Associates LLC. In March 2006, Judge Gonzalez ruled that claims “of bad actors” are subject to equitable subordination and disallowance, despite the transfer
of the claims after bankruptcy is declared. The judge said he was concerned with laundered claims.
 
Springfield Associates, with Citigroup, asked the US District Court in New York to review that ruling. US District Judge Shira Scheindlin said in an August 27, 2007, ruling that she believed there should be different treatment for claims that were sold on the open market versus those that had been assigned. The judge was, in effect, responding to concerns that by disallowing, or subordinating all transferred claims would have a souring effect on the $500 billion distressed debt market.
 
The argument was that someone who buys a claim should not be held responsible for bad conduct of those from whom they bought the claim. Someone, however, who takes the claim on assignment, however, should “stand in the shoes,” as analysts say, of the bank that assigned the claim.
 
Judge Scheindlin nonetheless ruled to remand the case back to the bankruptcy court and ultimately let Judge Gonzalez determine at trial whether the claim in question was sold or assigned to Springfield Associates.
 
One New York law firm, in a review of Judge Scheindlin’s ruling, said the “critical question” of how a trial court will distinguish between claim assignments and claim sales, is unanswered. It said, “until this issue is resolved, parties engaged in trading distressed claims will need to proceed with caution to ensure they do no compromise their legal rights by improperly structuring their claim acquisition transactions.”
 
* This article is reproduced with the written permission of Platts, the energy information division of the The McGraw-Hill Companies.