586 B.R. 551
Bankr. D. Del.2018Background
- NewPage Corporation and affiliates filed Chapter 11 on Sept. 7, 2011; plan confirmed Dec. 14, 2012; Effective Date Dec. 21, 2012. Trustee (Litigation Trustee of NP Creditor Litigation Trust) sued ERCO to avoid and recover alleged preferential transfers totaling about $9.9M and to disallow ERCO's claims.
- Dispute centers on two supply agreements: a 2006 Sodium Chlorate requirements contract (Chlorate Contract) with multiple amendments, and an April 2008 Caustic Soda (sodium hydroxide) agreement (Soda Contract) and later 2013 agreement. ERCO attributes ~$8.4M of transfers to Chlorate and ~$1.44M to Soda; concedes ~$59,980 is a preference.
- The Plan deemed executory contracts that had not expired by Confirmation and were not scheduled for rejection to be assumed (Catchall Provision), so whether each contract was unexpired as of the Effective Date determines if ERCO can invoke the Section 365/assumption defense to Section 547 avoidance.
- Chlorate Contract: Term/termination was extended by Amendments 1 and 2 through June 30, 2012 (Amend. No. 2 gave ERCO an extend-or-notice mechanism); subsequent amendments altered pricing/TVAs but did not change Term/Termination language. Court found the Term/Termination was not further extended, so the Chlorate Contract expired by its terms before the Effective Date.
- Soda Contract: unsigned April 2008 offer and later confirmatory writings and amendments set an initial term through June 30, 2012 with automatic renewal "from contract year to contract year unless written notice of termination...90 days prior." Under Wisconsin law (applied by the court), the merchants’ confirmatory memo rule and absence of objection made the Soda Contract enforceable and it was an evergreen contract in effect at the Effective Date; later 2013 contract was treated as a new post-confirmation/reorganized-debtor agreement.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Chlorate Contract was unexpired as of Effective Date | Chlorate term expired before Confirmation/Effective Date; thus no assumption defense and transfers avoidable | Contract remained in effect by virtue of later amendments and course of dealing; parties intended to continue relations | Held for Trustee: Chlorate Contract expired/terminated pre-Effective Date; transfers attributable to it (~$8,404,634) are not protected by assumption defense |
| Whether Soda Contract was enforceable despite lack of signature | Soda Contract is unenforceable/expired; no valid prepetition contract to protect transfers | Soda Contract enforceable under merchant confirmatory-memo exception and is an evergreen agreement continuing past Effective Date | Held for ERCO: Under Wisconsin law, Soda Contract enforceable and auto-renewing; transfers attributable to it (~$1,442,835.51) are protected by assumption |
| Choice of law for Soda Contract | Trustee: unspecified but argues enforceability/expiration under applicable law | ERCO assumed Ohio; court must decide governing law before statute-of-frauds analysis | Court applied Wisconsin law (most significant contacts) and used Wisconsin UCC confirmatory-memo rule to find contract enforceable |
| Effect on ERCO's claims under §502(d) and recovery under §550 | Trustee sought disallowance of all ERCO claims if avoidable transfers recoverable | ERCO conceded one small preference and preserved other defenses | Court disallowed ERCO claims only to extent of avoided/preference amounts: $8,404,634 (Chlorate), $59,979.82 (conceded); allowed remainder, and ERCO entitled to defense for Soda-related transfers |
Key Cases Cited
- In re Kiwi Int'l Air Lines, 344 F.3d 311 (3d Cir.) (assumption under §365 defeats §547(b)(5) preferential-avoidance claim)
- In re NewPage Corp., 517 B.R. 508 (Bankr. D. Del.) (same plan/issue: executory contract not scheduled is deemed assumed under similar Plan catchall)
- Ctys. Contracting & Const. Co. v. Constitution Life Ins. Co., 855 F.2d 1054 (3d Cir.) (a contract that has expired according to its terms cannot be assumed under §365)
- In re Columbia Gas Sys. Inc., 50 F.3d 233 (3d Cir.) (definition and timing for determining whether a contract is executory)