601 B.R. 766
Bankr. S.D. Ohio2019Background
- Debtor ASPC Corp. sold assets to Ellett under an APA; Ellett had contractual right to designate executory contracts for assumption and assignment up to two business days before closing. Sale closed June 29, 2018.
- The Distributor Agreement between Debtor and Smith & Wesson (S & W) was not listed among Assigned Contracts pre-closing; Sale Order carved out the S & W Distributor Agreement and gave Ellett until July 5, 2018 to file a Notice of Designation, "subject to the right of any party-in-interest to object ... for any reason."
- Ellett failed to designate the Distributor Agreement before the APA deadline (June 27) but filed the Notice of Designation on July 5 after S & W agreed to reimburse fees and provide inventory value via a Second Amendment; S & W supported the designation.
- Debtor and the Official Committee objected, arguing (1) the Distributor Agreement is not assignable (or is non-executory) and (2) approving the assignment would extinguish a $4.2 million preference claim the estate has against S & W.
- The court found the Distributor Agreement to be an executory contract but held the Sale Order unambiguously allowed Debtor and Committee to object "for any reason," and that approval would harm the estate by eliminating the preference claim; the objections were sustained.
Issues
| Issue | Debtor/Committee Argument | S & W / Ellett Argument | Held |
|---|---|---|---|
| Is the Distributor Agreement executory? | Not executory; Debtor had ceased operations and S & W stopped shipments. | Executory; both parties had material, unperformed obligations (sales, shipments, trademark license, compliance). | Executory under Countryman and functional tests. |
| Did the Sale Order permit Debtor/Committee to object to a post-closing designation? | Sale Order ¶19 allows objection "for any reason"; objections timely; carve-out controls. | ¶19 merely extended Ellett’s time under the APA; APA's §2.5 gives purchaser absolute post-closing designation right. | Sale Order ¶19 unambiguously carved the Distributor Agreement out of §2.5 and permitted objections "for any reason." |
| Whether court should approve assumption and assignment given estate harm (preference claim)? | Assignment would eliminate estate’s $4.2M preference claim; harm outweighs any benefit. | Assignment benefits include delivery of Free Goods and elimination of contingent claims; assignment is permitted and APA/bargain should be enforced. | Assignment would likely bar recovery on preference claim and would harm estate; Court declines to approve assignment. |
| Can court rewrite Sale Order / limit "for any reason" to APA-permissible objections? | N/A | The phrase should be read to mean only APA-permissible objections; otherwise purchaser’s bargained rights are nullified. | Court will not rewrite an unambiguous agreed Sale Order; "for any reason" is plain and broad. |
Key Cases Cited
- N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513 (1984) (legislative history: executory contracts are those with performance due on both sides)
- Travelers Indem. Co. v. Bailey, 557 U.S. 137 (2009) (courts must enforce unambiguous orders/contracts as written)
- Terrell v. Albaugh (In re Terrell), 892 F.2d 469 (6th Cir. 1989) (adopts Countryman definition for executory contracts)
- In re Dartmouth Audio, Inc., 42 B.R. 871 (Bankr. D.N.H. 1984) (distributor agreements are generally executory)
- Superior Toy & Mfg. Co. v. Hyde, 78 F.3d 1169 (7th Cir. 1996) (assumption of contract can bar preference recovery)
- Kimmelman v. Port Auth. (In re Kiwi Int'l Air Lines, Inc.), 344 F.3d 311 (3d Cir. 2003) (assumption defense to preference actions)
- Anthony's Pier Four, Inc. v. HBC Assocs., 411 Mass. 451 (1991) (implied covenant of good faith and fair dealing prevents interference with contractual fruits)