Once a “creditor,” always a creditor, even if the creditor’s claim was paid before confirmation. That’s the teaching of a March 29 opinion by Bankruptcy Judge Keith L. Phillips of Richmond, Va., in the aftermath of the confirmation of the Toys ‘R’ Us chapter 11 plan.
If you strike a deal intended to apply only to creditors with unsatisfied claims, you’ve gotta say so. Simply saying “creditors” will include creditors whose claims have been paid.
The Creditor’s Claims Were Paid
The creditor was a customs broker. At the initiation of the chapter 11 case, the customs broker had a claim for about $9.5 million. One of the first day motions was a so-called critical vendor motion that the bankruptcy court eventually approved.
The customs broker was paid over the course of several months under the critical vendor motion. During the reorganization effort, the customs broker was paid for all of its post-petition services.
The reorganization effort failed, and the debtor initiated an orderly liquidation in chapter 11 that left some suppliers and administrative creditors with millions of dollars in unpaid administrative claims. There was an administrative claims bar date, but the customs broker filed no claim because it had no administrative claim.
To head off litigation, the debtor’s private equity sponsors, secured lenders and others entered into a settlement approved by the bankruptcy court that created a $180 million fund to make a partial distribution to holders of administrative claims.
Creditors who did not opt out of the settlement were to participate in distributions from the $180 million fund. Creditors who elected to take partial payment waived claims against the equity sponsors, lenders and others.
The settlement agreement provided that “non-insider pre- or post-petition creditors” that did not opt out would be released from chapter 5 avoidance actions, such as preference claims. The customs broker did not opt out.
Later, the debtor confirmed a chapter 11 plan, and later still, the creditors’ litigation trust created under the plan sued the customs broker for more than $12 million in preferences.
The creditor’s trust contended that the settlement only gave releases to creditors with unpaid claims that suffered losses. Citing the plain language of the settlement agreement, Judge Phillips disagreed and granted the customs broker’s motion for summary judgment dismissing the complaint.
Plain Language Governs
The trust wanted to introduce parol evidence based on negotiations over the settlement agreement to show the parties’ intent to grant releases only to creditors that suffered losses.
Judge Phillips interpreted the settlement agreement as a matter of contract law. Regardless of whether Virginia or New York law applied, he said,
[I]f language in a contract is plain and unambiguous, if reasonable minds would not disagree over its interpretation, and if the language cannot be reasonably susceptible to two different meanings, then parol evidence is inadmissible.
Judge Phillips found “no temporal or other limitations in” the settlement agreement that would limit “the releases to creditors that held unpaid claims as of a particular date.” He found the language to be “plain and unambiguous” because “[r]easonable minds would not disagree over the interpretation.”
Finding no qualifications “either expressly or implicitly” limiting the settlement to creditors with losses, Judge Phillips disallowed the submission of parol evidence.
Judge Phillips found it “difficult to fathom how” a creditor owed millions of dollars before bankruptcy and that extended postpetition credit “could be neither a prepetition creditor nor a postpetition creditor.”
The trust also contended that the customs broker gave no consideration for the release. Judge Phillips disagreed: By not opting out, the customs broker gave releases to the lenders, equity sponsors and others.
Finding the settlement agreement to be “plain and unambiguous,” Judge Phillips granted the customs broker’s summary judgment motion and dismissed the preference complaint, because it “expressly released avoidance claims against all prepetition and postpetition creditors.”
Once a “creditor,” always a creditor, even if the creditor’s claim was paid before confirmation. That’s the teaching of a March 29 opinion by Bankruptcy Judge Keith L. Phillips of Richmond, Va., in the aftermath of the confirmation of the Toys ‘R’ Us chapter 11 plan.
If you strike a deal intended to apply only to creditors with unsatisfied claims, you’ve gotta say so. Simply saying “creditors” will include creditors whose claims have been paid.
The Creditor’s Claims Were Paid
The creditor was a customs broker. At the initiation of the chapter 11 case, the customs broker had a claim for about $9.5 million. One of the first day motions was a so-called critical vendor motion that the bankruptcy court eventually approved.
The customs broker was paid over the course of several months under the critical vendor motion. During the reorganization effort, the customs broker was paid for all of its post-petition services.