I. Introduction
In late March Enron Creditors Recovery Corp. ("Enron") settled its latest and final MegaClaim against Citigroup, the largest bank in the U.S. [1] Citigroup agreed to pay $1.66 billion to Enron over its alleged responsibility in Enron's downfall. [2] In addition, Citigroup is releasing $4.25 billion in claims against the Enron estate, including a $4 billion claim reserve established by the U.S. Bankruptcy Court for the Southern District of New York. [3] Citigroup denied any wrongdoing in its dealings with Enron, but stated that it settled solely to avoid the expense and uncertainty of litigation. [4] Trial was set to start in April. Initially, Enron had sought $3 billion from Citigroup, alleging that number represented the amount fraudulently transferred by Enron to Citigroup. [5] Enron contended that Citigroup, in particular, played a central role in its collapse. [6]
This settlement effectively put an end to the MegaClaims litigation. John Ray III, Enron President and Chairman of the Board, marked the occasion, saying, "today's settlement marks an enormous accomplishment for the Enron estate, as it concludes the MegaClaims litigation and allows us to return over $5 billion to creditors of the Enron estate, including approximately $2.1 billion plus interest, gains and dividends to the Yosemite/CLN Trust claim holders." [7]
II. What is a MegaClaim?
Enron's collapse in 2001 led to massive litigation, not the least of which were the MegaClaims. A MegaClaim is the name given to the complaints filed in 2003 by Enron against eleven major banks and financial institutions it believes contributed to the collapse of Enron. [8] Specifically, the claims allege that the MegaClaims defendants were involved in the fraud, breaches of fiduciary duties, and civil conspiracy that resulted in the loss of tens of billions of dollars. [9] Beginning in 2005, Enron began to settle with many of these MegaClaims defendants, Citigroup being the largest settlement as well as the final. The settlements occurred as follows:
- July 2005, The Royal Bank of Scotland, $20 million
- July 2005, Royal Bank of Canada, $49 million
- August 2005, Canadian Imperial Bank of Commerce, $274 million
- August 2005, The Toronto-Dominion Bank, $130 million
- August 2005, JP Morgan Chase, $982 million
- May 2006, Credit Suisse, $94 million
- July 2006, Merrill Lynch, $29.5 million
- October 2006, Fleet Bank, $10.4 million
- November 2006, Barclays, $144 million
- December 2007, Deutsche Bank AG, $25 million
- March 2008, Citigroup, $1.66 billion
[10] These settlements resulted in a total of $3.42 billion for Enron creditors. [11] In addition, to these cash settlements, the MegaClaims defendants have subordinated $1.63 billion in claims against the Enron estate, excluding the $4 billion released by Citigroup from the claim reserve. [12] These numbers do not even begin to represent what has been received in equity transactions and commercial paper litigation.
III. What Does This Mean for Enron and its Creditors?
It remains to be seen how the end of this litigation will affect Enron's end game, the reorganization and liquidation of operations and assets for the benefit of its creditors and, ultimately, dissolution of the company. Although the MegaClaims have been resolved, uncertainty still surrounds the future recovery of Enron's creditors. What is certain is that now more than $5 billion can be distributed to those creditors, much of which was held in reserve due to the on-going litigation. [13] John Ray III explained, "the settlement 'accelerates distribution to creditors of significant cash trapped in the estate.'" [14]
Creditors have received 36 cents on the dollar since a bankruptcy plan was put in place in 2004. [15] Harlan Loeb, Enron spokesman, said this settlement would raise that figure to 37.4 cents on the dollar. [16] "Our efforts to date have exceeded original Enron Corp. estimates by greater than 225%," said John Ray III. [17]
The Citigroup settlement is still subject to approval by the Bankruptcy Court, but this settlement means an end to MegaClaims litigation and possibly the beginning of the end of the Enron nightmare.
Sources:
[1] Citigroup to Settle Enron Claims, MSNBC, Mar. 26, 2008. http://www.msnbc.com/id/23810393
[2] Id.
[3] Enron, Enron Reaches Agreement in Principle With Citigroup in MegaClaims Litigation, http://www.enron.com/index.php?option=com_content&task=view&id=129&Itemid=34 (last visited Apr. 15, 2008).
[4] Christopher Scinta, Citigroup Settles Enron Litigation for $1.66 Billion, BLOOMBERG, Mar. 26, 2008.
[5] Enron, FAQs, http://www.enron.com/index.php?option=com_content&task=view&id=6&Itemid=14 (last visited Apr. 15, 2008).
[6] Enron, Citigroup Litigation Information, http://www.enron.com/index.php?option=com_content&task=section&id=2&Itemid=3 (last visited Apr. 15, 2008).
[7] Enron, Enron Reaches Agreement in Principle With Citigroup in MegaClaims Litigation, supra note 3.
[8] Enron, Citigroup Litigation Information, supra note 6.
[9] Id.
[10] Enron, Litigation Overview, http://www.enron.com/index.php?option=com_content&task=view&id=10&Itemid=19#megaclaims (last visited Apr. 15, 2008).
[11] Enron, Creditors to Receive More Than $1 Billion in Latest Distribution, http://www.enron.com/index.php?option=com_content&task=view&id=130&Itemid=34 (last visited Apr. 15, 2008).
[12] Id.
[13] Scinta, supra note 4.
[14] Id.
[15] Id.
[16] Id.
[17] Enron, Creditors to Receive More Than $1 Billion in Latest Distribution, supra note 11.