Starting on April 28, 2017, Craig R. Jalbert, as Distribution Trustee of the Corinthian Distribution Trust, filed approximately 122 complaints seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 547, 548, 549 and and 550 of the Bankruptcy Code (depending upon the nature of the underlying transactions).  The Distribution Trustee also seeks to disallow claims of such defendants under Sections 502(d) and (j) of the Bankruptcy Code.

Corinthian Colleges and its affiliated debtors filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on May 4, 2015 under Chapter 11 of the Bankruptcy Code.   On August 28, 2016, the Court confirmed the Debtors’ Third Amended and Modified Combined Disclosure Statement and Chapter 11 Plan of Liquidation.  The Corinthian Distribution Trust was established in accordance with the Plan and Confirmation Order.

The various avoidance actions are pending before the Honorable Kevin J. Carey.  As of the date of this post, the pretrial conference has not yet been scheduled.

For preference defendants looking for an analysis of defenses that can be asserted in response to a preference complaint, below are several articles on this topic:

Preference Payments: Brief Analysis of Preference Actions and Common Defenses

Minimizing Preference Exposure: Require Prepayment for Goods or Services

Minimizing Preference Exposure (Part II) – Contemporaneous Exchanges

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

On September 3, 2014, Brent Williams, the Plan Trustee (“Trustee”) for Touch America Holdings, Inc., filed a complaint initiating an adversary proceeding against, among others, AT&T Corp. (AT&T”).  In a 36 page decision dated April 25, 2017, Judge Carey of the Delaware Bankruptcy Court granted AT&T’s motion for summary judgment, bringing the litigation to an end.  Judge Carey’s opinion is available here (the “Opinion”).  The dispute hinged on a number of contracts entered into in Touch America’s bankruptcy, all of which had been approved by the Court.

Judge Carey’s Opinion

Judge Carey’s Opinion begins with a 20 page recitation of undisputed facts.  He then provides an overview of the standard for summary judgment before addressing the decisive contract language.  He begins with the primary factor that can prevent a summary judgment ruling in a contract interpretation case – ambiguity.  “In a dispute over the meaning of a contract, the threshold question is whether the contract is ambiguous.”  Opinion at *26 (quoting Lockhead Martin Corp. v. Retail Holdings, N.V., 639 F.3d 63, 69 (2d Cir. 2011)).  “If a contract is unambiguous, the court should assign the plain and ordinary meaning to each term and interpret the contract without the aid of extrinsic evidence.”  Id. (quoting Alexander & Alexander Servs. v. These Certain Underwriters at Lloyd’s, 136 F.3d 82, 86 (2d Cir. 1998)).

Despite the Trustee’s argument that there was ambiguity in one of the contracts at issue (which seems to undercut the Trustee’s argument for summary judgment), Judge Carey held that “the fact that something is not stated explicitly does not mean that the language of the contract is ambiguous. I do not find the pertinent language to be ambiguous, and will assign the plain and ordinary meaning to each term and interpret the contracts without the aid of extrinsic evidence.”  Opinion at *28.

After summarizing the extrinsic evidence provided by the parties, Judge Carey held that “the terms of the SPC Settlement Agreement, as well as the other agreements at issue, [are] unambiguous. Accordingly, I will not consider the extrinsic evidence introduced by any of the parties.”  Opinion at *35.  In one paragraph, he cited to each of the controlling contract provisions to resolve this conflict, holding that the explicit, unambiguous language of the contracts and agreements at issue warranted a ruling on summary judgment in favor of AT&T.

One of the key issues, is language included in one of the agreements pursuant to which assets were transferred to AT&T.   New York and other courts consistently maintain that the term “’related to’ … is clear and unambiguous.”  Opinion at *27 (quoting Coregis Ins. Co. v. American Health Found., 241 F.3d 123, 129 (2d Cir. 2001).).  One court has stated that such a provision “constitutes the broadest language the parties could reasonably use.”  Opinion at *28 (quoting Fleet Tire Serv. v. Oliver Rubber Co., 118 F.3d 619, 621 (8th Cir. 1997)).  While the Trustee suggested other possible meanings of the language, Judge Carey held that those arguments were insufficient to create an ambiguity, as the alternative interpretations are simply not reasonable.  Id.

If a contract calls for the broadest language that parties could reasonably use, it is likely that the party for whose benefit that language was used will win the day.  No matter how effective a litigator you employ, the attorneys drafting a contract have more impact on the outcome of future litigation.  It can seem expensive to have a comprehensive contracted created.  Yet, one has but to consider how much more this litigation would have cost if AT&T lost on its motion for summary judgment, to realize that the time of the drafters of these agreements was a worthwhile expense.

John Bird practices with the law firm Fox Rothschild LLP. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

In a 24 page decision released April 13, 2017, Judge Walrath of the Delaware Bankruptcy Court denied a motion for summary judgment in a preference action brought by Charles Stanziale as the chapter 7 Trustee of Powerwave Technologies against Superior Technical Resources – Adversary Proceeding Case No. 15-50085.  Judge Walrath’s opinion is available here (the “Opinion”).  Judge Walrath held that “genuine factual disputes precluding summary judgment”.  Opinion at *6.  While we have summarized a large number of opinions on preference actions, this is one of the most informative opinions released by the Delaware Bankruptcy Court in recent memory.

The Opinion provides an in depth analysis of the most common defense to preference actions – the Ordinary Course of Business defense.  Judge Walrath discusses the Subjective test in detail and a quick overview of the Objective test, quickly passing over the New Value defense as “the Court must deny the Defendant’s Motion for Summary Judgment as to the new value defense until the ordinary course of business defense is determined.”  Opinion at *23.

Judge Walrath analyzes how a number of different factors contribute to a determination of whether a transaction was made in the ordinary course of business under the Subjective Test.  As she says, “[W]hether a given transaction was within the subjective ordinary course of business that had developed between the parties is a broad, fact-based inquiry requiring historic examination of the parties’ pre-preference period relations.”  Opinion at *10 (quoting Moltech Power Sys., Inc. v. Tooh Dineh Indus., Inc. (In re Moltech Power Sys., Inc.), 327 B.R. 675, 680 (Bankr. N.D. Fla. 2005)).  The factors she considers are:

  1. The Historical Period: “It is well-established that the historical period should encompass ‘the time period when the debtor was financially healthy.’” Opinion st *9 (citing Davis v. R.A. Brooks Trucking Co. (In re Quebecor World (USA), Inc.), 491 B.R. 379, 387 (Bankr. S.D.N.Y. 2013)).
  2. Ordinariness of the Transfers  “Payments made during the preference period do not have to ‘possess a rigid similarity to each past transaction’; however, there must be ‘some consistency.’” Opinion at *10-11 (quoting Menotte v. Oxyde Chem., Inc. (JLS Chem. Corp.), 424 B.R. 573, 581 (Bankr. S.D. Fla. 2010)).  Judge Walrath addresses five different methods for comparing transacitons within the preference period against those made prior to the preference period.
    1. Range Method: Judge Walrath opined that “there is a material issue of fact as to the proper baseline and the range method’s applicability.”  Opinion at *12.  Judge Walrath compared a number of different cases in which the Range Method was discussed.  In some, it was applied (see, e.g., Am. Home Mortg., 476 B.R. 124, 138 (Bankr. D. Del. 2012)), in others, it was determined to be too broad (see, e.g. Quebecor, 491 B.R. at 387).  Judge Walrath held that “there are genuine disputes of material fact regarding the range method’s appropriateness, which preclude summary judgment in this case.”  Opinion at *14.
    2. Batch Method: When multiple invoices are paid with each payment, a party can calculate the average age of invoices paid in each batch and, from these, derive a standard deviation range, which can then be compared to the payments made in the preference period.
    3. Days Sales Outstanding Method: The DSO Method involves multiplying the total amount of an invoice by the number of days that it took to be paid. That number is then divided by the total amount of the invoices in that batch.
    4. Inter-quartile Range Method: This method involves calculating the range and excluding the fastest and slowest paid quartiles (25%), and considering only the range that includes 50% of pre-preference payments.  There is no precedent in Delaware for the use of this methodology.
    5. Standard Deviation Method: This method involves calculating the average days between invoice and payment, and calculating the standard deviation of the average days to payment.  The argument is that all payments made within one standard deviation of the average are ordinary, and the remainder are not.
  3. Unusual collection activity: “Subsection 547(c)(2) protects those payments that do not result from unusual or extraordinary debt collection practices.” Opinion at *17 (citing McCarthy v. Navistar Fin. Corp. (In re Vogel Van & Storage, Inc.), 210 B.R. 27, 36 (N.D.N.Y. 1997)).  This includes a change in credit terms and defendant’s collection activities.

With all of these issues involving disputes of material fact, Judge Walrath opined that she was unable to issue summary judgment as to whether the subjective test protects any of the allegedly preferential payments from recovery.

Judge Walrath quickly moves through the objective test, holding that (1) a sufficiently detailed basis is needed to establish the relevant industry, (2) expert testimony is not required, and (3) there should be sufficient statistical data or supporting basis for the evidence related to the objective standard.  As the parties disagreed about the relevant industry or NAICS classification, summary judgment could not be entered on this issue either.

While this Opinion doesn’t create precedent that can be used to obtain a final resolution for defendants, it does define the issues that the Court will consider in ruling on a motion for summary judgment.  If you are a bankruptcy practitioner, or the defendant of a preference action, this Opinion should be considered required reading.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

Not uncommonly, a preference complaint fails to adequately allege that the transfers sought to be recovered by the trustee were made “for or on account of an antecedent debt owed by the debtor before such transfer was made”, as required under Section 547(b) of the Bankruptcy Code. Thus, when faced with a complaint to recover alleged preferential transfers, a defendant can proceed in one of two ways: (i) file an answer and raise affirmative defenses, or (ii) move to dismiss under Rule 12(b)(6).

Generally, if a motion to dismiss is filed on this basis, the Court will grant plaintiff leave to amend the complaint to adequately assert that such transfers are recoverable under Section 547(b) of the Bankruptcy Code.  But does the analysis change if the trustee files an amended complaint which continues to fail to meet pleading standards, and defendant once again moves to dismiss?

This question was addressed in the recent Delaware Bankruptcy Court decision of Solmonese v. Shyamsundar, et al. (In re AmCad Holdings, LLC, et al.), Adv. No. 15-51979 (Del. Bankr. Apr. 7, 2017).  There, the Liquidating Trustee commenced a lawsuit against defendants, which included former directors and officers of AmCad Holdings, LLC, et al. (“Debtors” or “AmCad”), for breach of fiduciary duty, preferential transfers, and claim disallowance.  The Court previously dismissed the original complaint because it lacked “related-to” jurisdiction over the fiduciary duty claims, and because the preference claims were not adequately pled.  The Liquidating Trustee was permitted to file an amended complaint to address the deficiencies as it related to the preference claims.

The Liquidating Trustee filed the Amended Complaint seeking to avoid and recover $651,496.50 of alleged preferential transfers made to Visagar M. Shyamsundar (“Defendant”) within one year of the petition date pursuant to sections 547 and 550 of the Bankruptcy Code.  Defendant again moved to dismiss, asserting that the Amended Complaint continued to fail to adequately allege that the transfers were made for or on account of an antecedent debt.

The Court granted dismissal as to five of the alleged transfers to Defendant for “car payments,” “payroll,” and “records storage”, totaling approximately $100,000. The Court held that the allegations did not support a claim that they were made in satisfaction of an antecedent debt owed to the Defendant.

In addition, the Court separately dismissed these transfers from the Amended Complaint because the Liquidating Trustee failed to satisfy his burden of demonstrating insolvency.  While insolvency is presumed within the 90 day period prior to the bankruptcy filing, the burden rests with a trustee to adequately allege insolvency for claims arising before such 90 day period.

Finally, the Court denied the Liquidating Trustee’s request to further amend as to the aforementioned transfers.  The Court noted that the Liquidating Trustee was put on notice of his deficiencies when the Court previously granted dismissal of the original Complaint, and did little to correct the deficiencies.  See Krantz v. Prudential Invs., 305 F.3d 140, 144 (3d Cir. 2002) (denying leave to amend previously amended complaint where motion to dismiss original complaint put plaintiff on notice of deficiencies, yet plaintiff failed to rectify them in his first amended complaint).  Accordingly, dismissal was granted with prejudice as to the five aforementioned transfers.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In a 33 page decision released March 29, 2017, Judge Sontchi of the Delaware Bankruptcy Court ruled on competing motions to dismiss the remaining claims and counterclaims in an adversary proceeding in the Affirmative Insurance bankruptcy – Adversary Proceeding Case No. 16-50425.  Judge Sontchi’s opinion is available here (the “Opinion”).  As Judge Sontchi stated in the Opinion, the issue was a simple one, Opinion at *3, there is a dispute of a material fact between the parties, and dismissal is therefor inappropriate.  Opinion at *4.

The issue arises as the result of the allocation of sales proceeds between parties with a claim on the debtor’s assets.  The plan appointed liquidator (the “AIC Liquidator”) asserts that the funds from the sale should be in its control pursuant to the plan, and held in trust to pay the estate’s tax liability.  Opinion at *12.  JCF AFFM Debt Holdings, L.P. (“JCF”) is the other party in interest in the Opinion.  JCF was a major lender to the debtor, and claimed to hold a validly perfected security interest in the account into which the sales proceeds were eventually deposited.

JCF had filed the complaint that initiated the adversary proceeding.  The AIC Liquidator filed its counterclaims and also moved to dismiss for lack of subject matter jurisdiction, arguing that this was a conflict between two creditors with no impact on the Debtor.

Judge Sontchi first addressed the argument of subject matter jurisdiction, determining that “the threshold question here is whether the funds [at issue] are property of the estate or not.”  Opinion at *21.  As Judge Sontchi ruled, the account at issue is in the name of the Debtor, and accordingly, “its funds are presumably property of the estate under section 541(a) of the Bankruptcy Code.” Opinion at *26. Citing In re BankUnited Financial, Judge Sontchi instructed that “what is or is not property of a bankruptcy estate is an issue that stems from the bankruptcy itself, one that can only arise in a bankruptcy proceeding…”  Opinion at *28.

On pages 31 and 32 Judge Sontchi examines the counterclaims and whether they should be dismissed.  It is interesting to note that a key aspect of his analysis, as I read the Opinion, is the remedy sought in the counterclaims – establishment of a constructive trust.  Judge Sontchi states: “The imposition of a constructive trust may be an appropriate remedy for any of the causes of action asserted.  Thus, if the AIC Liquidator prevails on any of the counterclaims it would be determinative of the ultimate issue of whether the funds are property of the estate. The Court finds that the Counterclaims contain specific factual allegations, taken they are true, to suggest that the AIC Liquidator is entitled to the funds in the …Account.. As such, it is apparent that there is a dispute of a material fact.”  I can’t help but wonder, if the counterclaims had sought relief of a different sort, such as damages, would the outcome have been the same?

At the end of the day, it’s hard to argue that a bankruptcy court doesn’t have jurisdiction over a matter that can, by definition, only arise in a bankruptcy – including determining what constitutes a debtor’s estate.  The determination of what is property of a debtor’s estate is a highly fact sensitive issue, and if there are facts in dispute, it is unlikely that a motion for summary judgment or a motion to dismiss will be granted.  We will, no doubt, continue to see them filed as they play an important role in narrowing the scope of a conflict, but in my experience and observation of the bankruptcy court, they are denied far more frequently than they are granted.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

In the recent decision of In re Molycorp, Inc., 562 B.R. 67 (Bankr. D. Del. 2017), Judge Sontchi held that a carve-out provision in a DIP financing order did not act as an absolute limit on the fees and expenses payable to counsel to the creditors committee in a case with a confirmed chapter 11 plan.

The DIP financing order contained a 250K carve-out for committee fees incurred in investigating claims against the lender.  After its investigation, the committee filed a motion seeking standing to pursue certain causes of action against the lender.  The parties then mediated and reached a global settlement agreement that paved the way for a consensual plan of reorganization.

After confirmation, the committee’s counsel requested $8.5 million in fees and 226K in costs.  The lender argued that the 250K carve-out in the DIP financing order constituted an absolute cap on fee payments.  The committee’s counsel responded that while the carve-out cap may have been relevant in an administratively insolvent case, it was irrelevant in a case with a confirmed chapter 11 plan.  The court agreed.

The court explained that “[t]he carve-out is essentially an agreement by the secured creditor to subordinate its liens and claims to certain allowed administrative expenses, permitting such professionals’ fees to come first in terms of payment from the estate’s assets. . . .  [W]hen there are insufficient unencumbered assets to pay professionals’ fees and no plan has been confirmed, professionals’ only recourse is the carve-out.”

Here, however, because a plan was confirmed, Bankruptcy Code Section 1129(a)(9)(A) required that, unless agreed otherwise, each holder of an administrative claim will receive cash equal to the allowed amount of such claim on the effective date of the plan.  Hence, “if the secured parties desire confirmation, the administration claims must be paid in full in cash at confirmation even it if means invading their collateral.”

The Court found that the carve-out language was “not different than a standard carve-out provision.  It does not connote in any way that the dollar-amount cap would operate as a complete bar against the allowance of administrative claims following plan confirmation.  In this respect, the dollar-amount cap was going to come into play if the attempts to confirm a reorganization plan had failed; it was not intended to come into play if a Chapter 11 plan was confirmed.”

Because the Court’s appointed fee examiner recommended (with minor adjustments) approval of the $8.5 million in fees and 226K in costs requested as reasonable compensation for actual and necessary services, the Court ordered their payment.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Serving as an illustration of the principal that a financial restructuring won’t save a business that has ceased to be frequented by customers, RadioShack has filed for bankruptcy for the second time in as many years.  The prior case was filed in the Bankruptcy Court for the District of Delaware as case no. 15-10197.  This case is also in the Bankruptcy Court for the District of Delaware, and is case no. 17-10506.  Prime Clerk is the noticing agent in both cases and maintains a copy of the Court’s docket on its website – http://www.primeclerk.com/case-archive/.

The first bankruptcy had three primary results: 1) RadioShack closed approximately 2,400 stores, 2) the remaining stores were sold as a going concern to General Wireless, Inc., and 3) an agreement was entered into with Sprint, providing for co-branded product, exclusive access for Sprint within the RadioShack stores, and the payment of a portion of RadioShack rents by Sprint.

At the time of this second bankruptcy filing, there were over 1,500 stores in operation.  According to the first day declaration of Dene Rogers (the “Rogers Declaration”) in support of this bankruptcy, RadioShack is again seeking to shed underperforming leases and pursue a sale or restructuring.  As part of this process, it has transferred 115 stores to Sprint in exchange for a $12 million payment and the termination of the Sprint agreement, with the possibility of receiving another $5 million following an investigation period.

RadioShack has sought authority to close and liquidate the inventory of “between 530 and substantially all of their stores.”  See Rogers Declaration at 22.  Accordingly, creditors will want to keep close tabs on this case to make sure that any debts owed or claims they may have are not eliminated.

John Bird is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  John is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach John at (302) 622-4263 or at jbird@foxrothschild.com.

On March 2, 2017, Cal Dive Offshore Contractors, Inc. (“Cal Dive” or “Debtor”) filed approximately 136 complaints seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 547, 548 and 550 of the Bankruptcy Code.

Cal Dive and its affiliated debtors filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on March 3, 2015 under Chapter 11 of the Bankruptcy Code.  According to each complaint, Cal Dive “constituted a global marine contractor that provided highly specialized manned diving, pipelay and pipe burial, platform installation and salvage, and well-intervention services to a diverse customer base in the offshore oil and gas industry.”

The various avoidance actions are pending before the Honorable Christopher S. Sontchi.  The pretrial conference has not yet been scheduled.

For preference defendants looking for an analysis of defenses that can be asserted in response to a preference complaint, below are several articles on this topic:

Preference Payments: Brief Analysis of Preference Actions and Common Defenses

Minimizing Preference Exposure: Require Prepayment for Goods or Services

Minimizing Preference Exposure (Part II) – Contemporaneous Exchanges

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

On February 28, 2017, Judge Sontchi of the Delaware Bankruptcy Court issued an opinion (the “Opinion”) in the Money Center of America  bankruptcy – Bankr. D. Del., Case 14-10603.  The Opinion is available here.  This Opinion decided two separate, but similar, motions to dismiss filed by 2 entities owned by federally recognized Indian Tribes and sovereign nations (the “Tribes”).  Each of these Tribes owned a casino (through wholly owned entities) in which the Debtor placed ATMs and other cash advance services, in order to allow casino patrons ready access to funds.  The process that was followed in each case is that the Debtor would provide the ATM or service, the casino would advance the funds by providing payments and stocking the ATMs, and the Debtor would reimburse the casinos from the funds transferred by the patrons’ banks.  In this process, the Debtor would also charge the patrons a fee, funding its operations.

This was a process in which large sums of money flowed, but with little direct benefit to the casinos or the Debtor, as the majority of funds came from a patron’s bank and was paid to the patron.  Of course, I make no judgment as to how much additional profit this allowed the casinos to recognize, as the direct and initial transfers involved were to the patrons, through the casinos and Debtor.  Naturally, the Debtor was required to make frequent payments to the casinos as reimbursement for funds advanced and, following the Debtor’s bankruptcy filing and the appointment of the Trustee in this bankruptcy, significant preference and fraudulent conveyance lawsuits were initiated.

The Opinion

Judge Sontchi carefully weighs several issues in this Opinion, ultimately holding that (1) the Tribes sovereign immunity arguments are to be considered as Rule 12 motions, not as affirmative defenses [Opinion at *15], (2) the casinos enjoy the sovereign immunity of the Tribes [Opinion at *22], (3) the Bankruptcy Code does no abrogate the sovereign immunity [Opinion at *27], and (4) the filing of a claim by one of the Tribes will allow the Trustee’s action to proceed solely to determine if the preference action can recoup the amount of the claim [Opinion at *36].

This is a lengthy opinion, containing a large number of citations to controlling authority.  At no point did Judge Sontchi gloss over any of the case law supporting his holdings.  Accordingly, I consider this Opinion to be important reading material for any attorneys involved in preference litigation against foreign sovereigns.  It also makes me regret not having taken the class on “Native American Law” when in school – the issues involved are very interesting.

We have published a number of posts about preference actions on this blog.  The key issue of note here, is that many trustee’s merely look at a debtor’s check register and sue each and every recipient of transfers in the 90-day time period immediately preceding the debtor’s bankruptcy filing.  As this is what is allowed under the Bankruptcy Code, this is the procedure most frequently used by trustees.  Most of the time, the trustee involved has an informational problem and the only way to start talking with opposing parties in is to file suit.  I haven’t ever had a conversation go well when it starts, “you might owe me money and I’d like to talk to you about whether you do.”  But this is exactly the situation trustees often find themselves in.

If you are a named defendant in a preference action, the first step is to make sure you understand the law surrounding preference litigation.  Educate yourself, then have your lawyer start a dialogue with the Trustee’s lawyer.  The vast majority of preference actions settle or are dismissed once the parties understand whether there were actual preference payments or not.  If you are in the lucky position to have not yet had a client or customer go through bankruptcy, (1) count yourself lucky and (2) start making plans to protect yourself for when one of them does go under.  It isn’t pretty, but since most of us aren’t foreign sovereigns, we need to plan carefully toy reduce our preference exposure.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

On February 21, 2017, Judge Silverstein of the Delaware Bankruptcy Court issued an opinion (the “Opinion”) in the Outer Harbor Terminal bankruptcy proceeding – Bankr. D. Del., Case 16-10283.  The Opinion is available here.  This Opinion decided the Debtor’s objection to a claim for breach of contract filed by Kawasaki Kisen Kaisha, Ltd. (“K Line”).  The claim objection objected both to the amount of the K Line claim, and to the very existence of the K Line claim.  The Opinion only addressed the claim’s validity and did not liquidate the claim.  That issue was reserved by Judge Silverstein for a later trial.  However, I’m of the opinion that the amount of the claim will be determined consensually, as most issues are in bankruptcy proceedings.

Background

In 2013, K Line entered into an agreement with the Debtor to provide stevedoring and terminal services at the Port of Oakland.  Opinion at *2.  Unfortunately, the Debtor was never profitable and, in 2016, declared bankruptcy.  With that action in mind, on January 21, 2016, the Debtor provided notice to K Line that it would be winding down operations and intended to cease handling vessels as of February 20, 2016 and cease handling gates as of March 19, 2016.  However, the Debtor serviced K Line through March 28, 2016.  In anticipation of the Debtor’s termination of services, on March 4, 2016, K Line found a new provider of services and entered an agreement accordingly.  K Line then filed a claim in this bankruptcy case, and the Debtor objected on November 4, 2016.  An evidentiary hearing was held January 12, 2017 and this Opinion followed.  Opinion at *2-4.

The Opinion

Judge Silverstein focused entirely on the Agreement and the actions of the parties, needing to look no further than the document and the testimony of the Debtor.  She cited to the following chain of logic in making her decision:  1) The Agreement allowed either party to terminate immediately upon certain events occurring, including bankruptcy, Opinion at *7; 2) The Agreement does not provide that termination is self-executing, Opinion at *8; 3) Neither Debtor’s counsel, nor the witness it presented at the hearing testified or argued that the Debtor communicated to K Line that the Agreement was terminated, Opinion at *8-9.

Judge Silverstein makes it clear that although the Bankruptcy Court is a court of equity, it will not rewrite contracts.  “Just as the Court cannot rewrite the Agreement to save ‘K’ Line from a bad bargain, it cannot rewrite the Agreement to save the Debtor from any perceived penalty resulting from its choice to be a good corporate citizen.”  Opinion at *10.  Judge Silverstein held that the announcements of upcoming work stoppage appear to have been a repudiation.  Opinion at *11.  Pursuant to California law, which controlled the Agreement, a party injured by repudiation can elect its remedy, either treating the repudiation as anticipatory breach and seek damages, or ignore the repudiation, await the time when performance is due and exercise remedies for the actual breach.  In this instance, however, neither party briefed the issue of anticipatory breach or damages.  Accordingly Judge Silverstein “grant[ed]” them the opportunity to brief the issue in connection with a damages trial.  Opinion at *12.

Contract law is a part of nearly every business transaction – from retaining employees, to selling goods or services, to finding ways to protect your assets and business opportunities.  While the Bankruptcy Court is a court of equity, at the end of the day, all of the judges have studied contract law (even if only in preparation for the bar), and will give parties to a contract the benefit (or loss) of their bargains.  It is my hope that all of you reading this post will not need to exercise contractual protections.  But in today’s volatile business environment, even if all the parties to a contract are acting in good faith, a good contract, and following it closely, is the best protection for your business.  Should you ever have a contract counter-party encourage you to push through an incomplete contract, it may do well to remind them, and yourself, that strong fences build strong neighbors.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.