Pirinate Consulting Grp., LLC v. ERCO Worldwide (In re Newpage Corp.)Pirinate Consulting Grp., LLC v. ERCO Worldwide (In re Newpage Corp.)
KEVIN GROSS, U.S.B.J.
The Court is issuing its opinion in this preference adversary proceeding. On September 7, 2011 (the "Petition Date"), NewPage Corporation
Pending before the Court is ERCO's motion for partial summary judgment (the "Motion") pursuant to Federal Rule of Civil Procedure 56, made applicable to this adversary proceeding by Federal Rule of Bankruptcy Procedure 7056. Adv. D.I. 36. ERCO principally argues that the bulk of the alleged Transfers were on account of pre-existing, ongoing contracts between the parties, rendering them unavoidable as a matter of law.
FACTS
A. The Parties
Pre-bankruptcy, the Debtors and their non-debtor subsidiaries and affiliates comprised the largest coated paper manufacturer in North America. Declaration of George F. Martin, dated Seрtember 7, 2011 ("Martin Decl.") ¶ 4; D.I. 3.
B. The Contracts
The Court merely introduces the Contracts below and reserves analysis for the discussion.
1. The Chlorate Contract
In January 2006, ERCO and NewPage executed the Chlorate Contract. See App. Ex. at A0009-16. The Chlorate Contract, governed by Ohio law, was a standard requirements contract, wherein ERCO agreed to sell NewPage its entire need for Sodium Chlorate Crystal for two mills. Id. at A0015-16. The Chlorate Contract also provided that "[t]his Agreement can be modified or amended only by a writing duly executed by the seller and the buyer" (the "No Oral-Modification Clause"). Id. at A0014. The initial "Term and Termination" section lasted until the earlier of December 31, 2006, or a written termination to the other party for breaches, defaults or other related issues. However, beginning in 2009, the parties amended the Chlorate Contract five times. Id. at A0012; Christie Decl. ¶ 4. Importantly, only two of the five amendments addressed the Chlorate Contract's Term аnd Termination section. See App. Ex. at A0017, A0021.
2. The Soda Contract
In April 2008, NewPage and ERCO negotiated the alleged Soda Contract. See Motion ¶¶ 25-29; Cross-Motion ¶¶ 11-15. The Soda Contract was amended several times before the parties executed a "new" Chloralkali Supply Proposal in 2013 (the "2013 Soda Contract"). See Corrected Declaration of John F. Christie, dated July 22, 2016 ("Amend. Christie Decl.") ¶ 5; Adv.
Determining the Contracts' dates of expiration or termination is of critical importance given the Plan's treatment of executory contracts. Section 8.1 of the Plan, concerning "Assumption and Rejection of Executory Contracts," provides that:
Each Executory Contract that has not expired by its own terms on or prior to the Confirmation Date, [i.e., December 14, 2012,] and which has not been assumed, assumed and assigned, assumed as modified, or rejected with the approval of the Bankruptcy Court, or which is not the subject of a motion to assume, assume and assign, assumed as modified, or reject as of the Confirmation Date, shall be [dealt with in accordance with the terms of this Section].
More specifically:
Schedule 8.1(A) set forth contracts to be rejected, Schedule 8.1(B) set forth the contracts to be assumed, Schedule 8.1(C) set forth the contracts to be assumed as modified, Schedule 8.1(D) set forth the contracts to be assumed and assigned, and Schedule 8.1(E) set forth the contracts related to the SEO Settlement Agreement (as defined in the Plan).
Motion ¶ 38 (paraphrasing the Plan). Executory contracts not addressed in Schedules 8.1(A)-(E) are "deemed assumed by the Dеbtors and this Plan shall constitute a motion to assume that Executory Contract" (the "Catchall Provision"). Plan ¶ 8.1(f). The Confirmation Order (¶ 16) reinforced the Plan, finding:
Any executory contract or unexpired lease of personal property of the Debtors that is not set forth in Schedules 8.1(A)-(E) is hereby deemed to have been assumed by the Debtors, except as otherwise provided in Schedule 8.1 of the Plan Supplement. Each executory contract or unexpired lease assumed hereunder shall include any modification, amendments, supplements, or restatements to such contract or lease. Entry of this Confirmation Order constitutes approval of such assumptions pursuant to section 365(a) of the Bankruptcy Code....
Although the Debtors maintаined the right to adjust Schedules 8.1(A)-(E) until the Effective Date (Plan ¶ 8.1), Schedule 8.1 does not reference ERCO,
The Court has subject matter jurisdiction over this adversary proceeding under
STANDARD OF REVIEW
A bankruptcy court must grant summary judgment where "there is no genuine issue as to any material fact and that [each of] the moving part[ies] is entitled to a judgment as a matter of law." Kiwi ,
DISCUSSION
Count I: To Avoid Preferential Transfers Pursuant to
In order for the Trustee to avoid an allegedly preferential transfer pursuant to Section 547, it must satisfy the elements set forth in the statute itself:
Except as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property-
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made-
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such сreditor would receive if-
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
The Third Circuit has held that " section 547(b)(5) cannot be satisfied where an executory contract is assumed under section 365 [.]" Motion ¶ 49 (citing Kiwi ,
A. The Chlorate Contract
The Court begins its discussion with the focal point of the Transfers, the Chlorate Contract. The parties amended the agreement several times and dispute the legal effect of such amendments. Although the amendments reference a variety of the Chlorate Contract's provisions, the Court highlights only those it deems important for deciding the issue.
1. The Amendments
a. The First Amendment ("Amend. No. 1")
Dated April 2009, Amend. No. 1 extended the "Term and Termination" section from December 31, 2006 to December 31, 2011. App. Ex. A0017. Amend. No. 1 also provided that "Except as specifically augmented and modified herein, the Agreement is unchanged and remains in full force and effect." Id. at A0019.
b. The Second Amendment ("Amend. No. 2")
Dated September 2009, Amend. No. 2 changed the Term and Termination section as follows:
[1](a) This Agreement has been in effеct as and from January 1, 2006 and will continue in full force until the earlier of
(i) December 31, 2011 unless extended pursuant to section 1(b) or
(ii) any earlier termination pursuant to section 2; (the "Term")
[1](b) The parties acknowledge and agree that [ERCO] shall have the option to extend this Agreement for one period of six (6) months on the same terms and conditions contained in this agreement, in which case this Agreement shall terminate on June 30, 2012. The option to extend as set forth in this paragraph shall be deemed exercised by [ERCO] unless [ERCO] notifies [NewPage] in writing ....
The Parties agree to meet in the second quarter of 2011 to discuss options for an extension of this Agreement effective January 1, 2012 based on the market at that time.
App. Ex. A0021. ERCO never notified NewPage in writing of its intеntion to terminate the Chlorate Contract; thus, it was automatically extended through the agreed upon June 30, 2012. Motion ¶ 18 (citing Christie Decl. ¶ 11). Amend No. 2 also modified the "Price and Payment Terms" section, noting ERCO would-for the first time-"provide a Temporary Voluntary Allowance" (the "TVA"). Id. at A0020. The TVA reduced the Base Price, as defined in the same amendment, resulting in a "lower net purchase price." Cross-Motion ¶ 22.
c. The Third Amendment ("Amend. No. 3")
Dated January 2010, Amend. No. 3 solely addressed the Price and Payment Terms seсtion. See id. at A0023-24. Amend. No. 3 replaced the recently expired TVA under Amend. No. 2. Id. at A0023; Cross-Motion ¶ 24. Amend. No. 3 did not amend the Term and Termination section of the Chlorate Contract. App. Ex. at A0024 ("Except as specifically augmented and modified herein, the Agreement is unchanged and remains in full force and effect."); see Cross-Motion ¶ 25. Rather, Amend. No. 3 explicitly provided that the "Parties agree that the above Price and Payment Terms apply for calendar year 2010 only. The Price and Payment Terms of Amendment No. 2 dated September 15, 2009 shall be [sic] return to full force and effect after December 31, 2010." App. Ex. at A0024.
d. The Fourth Amendment ("Amend. No. 4")
Dated January 2011, Amend. No. 4 modified the Price and Payment Terms and instituted a new TVA. App. Ex. at A0025-26. Amend. No. 4 also provided that if the parties agreed to a long term contract before June 30, 2011, the pricing structure outlined therein would remain in place through December 31, 2011. Id. at A0026. Failure to execute a long term contract would render the TVA void as of July 1, 2011 "and the Base Price w[ould] be subject to semi-annual increases beginning July 1, 2011 as outlined in Article 7 below." Id.
e. The Fifth Amendment ("Amend. No. 5")
Dated July 2011, Amend. No. 5 modified the Price and Payment Terms and the TVA, which remained tied to NewPage's purchаse volume. App. Ex. at A0028-30. The price mechanism therein would expire on January 1, 2012; thereafter, the TVA would be removed and, like Amend. No. 4's terms, the Base Price would be subject to semi-annual increases in January and July of each year. Id. at A0029. Amend. No. 5 did not provide an end date for the semi-annual price increases (Motion ¶ 21) and, like Amend. Nos. 3 and No. 4, it "did not modify the Term and Termination section
2. The Amendments and Contractual Ambiguity
The Trustee claims that the Chlorate Contract and its amendments are unambiguous, as the Term and Termination section "clearly expired prior to the Confirmation Date." Cross-Motion at p. 14. ERCO argues that the Trustee's reading is contrary to the mandates under Ohio law and "is based on an isolated reading of one provision of Amend. No. 2 and if accеpted, would render provisions in subsequent amendments meaningless." Reply Brief in Support of Motion of Defendant ERCO Worldwide, a Division of Superior Plus LP, for Partial Summary Judgment and Answering Brief in Opposition to Plaintiff's Cross Motion for Summary Judgment in Favor of Plaintiff ("Reply") ¶ 4; Adv. D.I. 48. ERCO highlights several provisions in Amend. No. 5 that purport to show that the parties intended to continue transacting business. See id. ¶¶ 6-8 (detailing that " 'the TVA will be removed ... and the Base Price will be subject to semi-annual increases [,]'.... the 'Base Price will be subject to semi-annual increases in January and July of each year [,]' " and the fact that "[t]he letter of credit issued by NewPage in ERCO's favor did not expire until July 31, 2012," a month after the "purported termination date"). These competing interpretations require the Court to consider whether an ambiguity exists.
Under Ohio law, contractual ambiguity is a mаtter of law. Cross-Motion ¶ 50 (citing Eclipse Res.-Ohio, LLC v. Madzia ,
Contractual language is ambiguous 'only where its meaning cannot be determined from the four corners of the agreement or where the language is susceptible of two or more reasonable interpretations.'... '[C]ourts may not use extrinsic evidence to create an ambiguity; rather, the ambiguity must be patent, i.e., apparent on the face of the contract.' ... If the language in the contract is ambiguous, the court should generally construe it against the drafter.
Eclipse ,
B. The Soda Contract
The Court now considers the remaining Transfers and the validity of the Soda Contract. The root document that ERCO argues serves as the Soda Contract is an unsigned offer letter, dated April 2008. See App. Ex. at A0038-39. Such a document reveals statute of frauds concerns. Ordinarily, the Court would begin by considering exceptions to the doctrine and determine to what extent those exceptions have or have not been satisfied. Here, however, the Court must first consider a choice of law issue, as the Soda Contract and its associated amendments do not reference the governing law of the Soda Contract. Compare
"The Third Circuit instructs courts to first determine if there is an actual conflict between competing state laws before proceeding with a choice-of-law analysis." In re Am. LaFrance, LLC ,
One line of cases provides that a false conflict exists if there are no relevant differences between the laws of the two stаtes, or the laws would produce the same result. If there is a false conflict under this definition, the court does not have to engage in a choice of law analysis, and may refer to the states' laws interchangeably.
Hammersmith v. TIG Ins. Co. ,
It is well settled that federal courts apply the choice of law principles of the state in which they sit (see Piper Aircraft Co. v. Reyno,
ERCO assumes without citation that Ohio law governs the Soda Contract, but the Court prefers a more thoughtful analysis of the states' competing interests.
The Trustee maintains that the Soda Contract was "unsigned, [and ERCO's] reliance is misguided, as it has not proven the existence of a valid contraсt." Cross-Motion ¶ 77. However, as argued by ERCO (albeit in the context of Ohio law), Wisconsin maintains exceptions to the statute of frauds that would render the unsigned offer letter a binding agreement between the parties. The Wisconsin statute provides:
(1) Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by the party's authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this subsection beyond the quantity of goods shown in such writing.
(2) Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of sub. (1) against such party unless written notice of objection to its contents is given within 10 days after it is received.
In the alternative, the Trustee argues that, even if the Soda Contract is enforceable, which the Court has just found that it is, "it would have expired on June 30, 2012." Cross-Motion ¶ 78. The Trustee's argument is, however, misguided and stems from a misinterpretation of the parties' amendments. ERCO sent NewPage an email on September 16, 2009, which included a letter (dated July 29, 2009) recapping the Soda Contract's terms and certain amendments thereto. App. Ex. at A0041-42.
Despite finding that the Soda Contract was an evergreen contract and assumed pursuant to the Plan, the Court must address an interesting wrinkle-the parties' execution of the 2013 Soda Contract. App. Ex. at A0064-65. Although the 2013 Soda Contract was еxecuted in April 2013, the "Contract Term" was retroactive and provided "January 1, 2012 to December 31, 2013; evergreen contract with 90 day cancellation."
The Soda Contract and the 2013 Soda Contract are strikingly similar. Compare App. Ex. at A0038 (referencing the Wisconsin Rapids, Biron and Stevens Point mills) with
Counts II and III: To Recover Property Pursuant to
The Trustee also asks the Court to disallow ERCO's claims in the Debtors' bankruptcy case. The Trustee's request for disallowance depends upon Section 502(d), which provides for disallowance of claims if the claimant is liable for avoidance rеcoveries. ERCO's claims will be allowed except for the $59,979.82, which ERCO concedes is a valid preference, and the $8,404,634.00 under the Chlorate Contract.
CONCLUSION
The Court will grant the following relief:
1. The Court will grant the Cross-Motion in part, finding that, due to the expiration of the Chlorate Contract, and subject to ERCO's additional defenses under Section 547(c), ERCO is not entitled to a defense for the Transfers attributable to the Chlorate Contract, totaling $8,404,634.00. The Motion on the same issue is denied.
3. Based on ERCO's concession, the Trustee is awarded a preference in the sum of $59,979.82.
Notes
NewPage Group Inc. owned 100% of NewPage Holding Corporation's common stock, which in turn owned 100% of the common stock of NewPage Corporation. Complaint to (A) Avoid Transfers Pursuant to Bankruptcy Code Sections 547 and 502, and (B) Recover Property Transferred Pursuant to Bankruptcy Code Section 550 ¶¶ 14-15; Adv. D.I. 1. "NewPage Corporation was the Company's primary operating subsidiary and indirectly owned the other Debtors and various other affiliated non-debtor entities."
References to "D.I." refer to the main proceeding's docket, references to "Adv. D.I." refer to this proceeding's docket, and references to "App. Ex." refer to the Appendix to Opening Brief in Support of Motion of Defendant ERCO Worldwide, A division of Superior Plus LP, for Partial Summary Judgment . Adv. D.I. 41.
ERCO alleges that $8,404,634.00 and $1,442,835.51 of the Transfers were on account of the Chlorate Contract and the Soda Contract (as defined below), including their amendments, respectively. Christie Decl. ¶ 25. ERCO concedes that $59,979.82 is a valid preference.
Unlike regular writing or typing paper, coated paper is typically used in magazines and the like. Martin Decl. ¶ 6.
There was a dispute as to whether the 2013 Soda Contract was a "new" contract or an "amendment to" the Soda Contract. See Christie Decl. ¶ 15; Cross-Motion ¶¶ 79-80. ERCO's amended declaration clarified that it was, in-fact, a "new" contract. See Amend. Christie Decl. ¶ 5.
The Debtors, in support of their bankruptcy petitions, listed an executory contract with ERCO for "raw materials" on their Schedule G (Executory Contracts and Unexpired Leases) of assets and liabilities. D.I. 672; D.I. 1894.
ERCO reserves their rights with resрect to additional defenses under Section 547. Motion at p. 20, n.12.
The Bankruptcy Code does not define 'executory contract,' but the accepted definition is that of Professor Countryman. 'An executory contract is a contract under which the obligation of both the bankrupt and the other party to the contract are so far underperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.' In re Columbia Gas Sys. Inc. ,
In re HQ Global Holdings, Inc. ,
The price reduction fluctuated "depending on which of the Debtors' mills, or manufacturing sites, was the ultimate destination of the purchаsed Sodium Chlorate." Cross-Motion ¶ 5, n.5.
In full, Article 7, found in Amend. Nos. 4 and No. 5, provided:
The Base Price will be subject to semi-annual increases in January and July of each year. The semi-annual periods are (i) January through June; and (ii) July through December. Within ten (10) days of the close of each semi-annual period, Seller shall provide written notice to Buyer of any price increases. Notwithstanding the foregoing, each semi-annual price increase shall not increase by an amount greater than six percent (6%) and is exclusive [sic] any other charges for which Buyer may be responsible.
App. Ex. at A0026, A0029.
ERCO asserts that "the parties further agreed to extend the TVA until June 30, 2012." Motion ¶ 21 (citing Christie Decl. ¶ 8). This contention is unsupported by the record, as the Christie Declaration mеrely references an ERCO email stating that, pursuant to the reporting duties under Article 7, prices would soon increase. ¶ 8 (citing App. Ex. at A0066); see also Cross-Motion ¶¶ 32-33 (making no reference to the alleged TVA extension).
The Court does not take up the issue of what type of relationship existed between the parties beyond the Chlorate Contract's June 30, 2012, expiration, e.g., whether it was a "new" contract on the basis of the same terms, an implied in-fact contract or some other type. Such analysis is unnecessary given that any such contract would be a post-petition contract between NewPage and ERCO.
See Actual Notice, Black's Law Dictionary (10th ed. 2014) ("Notice given directly to, or received personally by, a party.").
The Court does, however, wish to briefly address the no-oral modification provision under Ohio law and why, it, too, weighs in favor of NewPage. In Fields Excavating, Inc. v. McWane, Inc. , the court thoroughly reviewed a challenge to a no-oral modification clause, finding that although it was unenforceable in the instant matter, and generally against Ohio public policy, that such clauses are not per se unenforceable.
Each of the states addressed herein maintain the same exceptions to the statute of frauds. Compare
Although ERCO is a Canadian entity, the Court does not havе reason to believe that the parties-both of whom were transacting business domestically under the alleged contract-would have designated Canadian law to govern their relationship.
Given the parties' stature in the chemical and paper industry, both are merchants under Wisconsin law. See
The Trustee argues that the Soda Contract's amendments were "inconsistent with the parties' conduct under the Chlorate Contract, in which amendments were clearly marked." Cross-Motion ¶ 79. This is of no moment to the Court, as the Soda Contract does not specify a particular form of amendment. Further, it appears that NewPage, as evidenced by their letterhead (see App. Ex. at A0009), drafted the Chlorate Contract, while ERCO, as evidenced by their letterhead, drafted the Soda Contract.
Such a finding is not inconsistent with this Court's recent decision in In re Thane Int'l, Inc. , No. 17-50476,
"A ton is 2,000 pounds." App. Ex. at A0064.