A specific provision in a contract may control over a more general provision, even when the general provision contains a preface saying that it controls, notwithstanding anything else in the contract.
The contract interpretation by District Judge Maryellen Noreika of Delaware confirms the adage that the bankruptcy court can’t sell what the debtor doesn’t own, even when some of the language in the contract seems to expand the universe of the debtor’s property.
The debtor corporation produced movies. A senior executive had a so-called participation interest of almost 2% in a particular film that turned out to be a hit.
Immediately after filing in chapter 11, the debtor sold all of the assets free and clear under Section 363. Later, we will mention the specific and seemingly conflicting provisions in the purchase and sale agreement.
The executive believed that the sale preserved his participation, but the purchaser didn’t.
Almost three years later, the executive filed a motion in bankruptcy court to enforce the sale agreement and compel the purchaser to pay his participation interest. The purchaser opposed, but Bankruptcy Judge Mary F. Walrath of Delaware took sides with the executive. District Judge Noreika affirmed in an opinion on August 10.
Standard of Review
The parties disagreed over whether the standard of review was de novo or abuse of discretion.
Judge Noreika said that the Third Circuit followed the Eleventh Circuit, which had said that a majority of courts believe that a bankruptcy court’s interpretation of its own order is reviewed for abuse of discretion, but not when the only issue is a question of law.
In other words, deciding whether the order is ambiguous is subject to de novo review. If the order is ambiguous, the appellate court defers to the bankruptcy court’s interpretation unless it is unreasonable.
Specific Controls over the General
Agreeing with the bankruptcy court, Judge Noreika said that the contract was not ambiguous, but the parties disagreed about which provision was decisive.
The executive relied on a provision in the contract saying that the assets were sold free and clear, except for “permitted liens.” In turn, “permitted liens” was defined to include participation interests. A schedule to the contract listed the executive as holding participation interests.
For his participation interests, the executive had a secured claim that rode through the chapter 11 sale unaffected.
The buyer relied on a different provision in the contract that began with the preface, “Notwithstanding any provision of this Agreement or any other writing to the contrary.” It went on to say that the assets were sold free and clear of amounts due to affiliates of the debtor. The executive was an affiliate, all agreed.
The buyer contended that the “notwithstanding” provision meant that the film was sold free of the executive’s participation interest.
Judge Noreika disagreed, although she said that “notwithstanding” provisions are “often deemed controlling.” She went on to say:
In this case, however, the “notwithstanding” clause at issue is a very broad provision, standing in contrast to specific provisions preserving [the executive’s] Participation Interest, and adopting such an interpretation of the “notwithstanding” clause would lead to unreasonable results.
Adopting the buyer’s interpretation, Judge Noreika said, would relieve the buyer of its obligation to pay the executive “despite the fact that the [asset purchase agreement] and Sale Order specifically provided that the sale of the Film was subject to that Participation Interest.” [Emphasis in original.]
Next, the buyer argued that the participation interest was not extinguished. Rather, the buyer contended that the liability was thrust onto the liquidating trust created by the debtor’s chapter 11 plan.
Judge Noreika called the argument “illogical and unreasonable” because the liquidating trust would be liable for the debt, even though the trust would be receiving no income from the film. She also found inconsistencies with the contract and the court’s sale order.
Finally, the buyer contended that the executive waived his argument by not raising the issue before the bankruptcy court approved the sale. Judge Noreika said, “It is unclear what facts [the buyer] believes should have prompted such an objection when the [asset purchase agreement] clearly lists [the executive’s] Participation Interest as a Permitted Lien.”
Judge Noreika affirmed Judge Walrath, effectively ruling that the buyer was obligated to pay the executive’s participation interest.
The buyer immediately appealed to the Third Circuit. A decision from the Court of Appeals may tell us whether or not a “notwithstanding” clause always controls a more specific provision.
A specific provision in a contract may control over a more general provision, even when the general provision contains a preface saying that it controls, notwithstanding anything else in the contract.
The contract interpretation by District Judge Maryellen Noreika of Delaware confirms the adage that the bankruptcy court can’t sell what the debtor doesn’t own, even when some of the language in the contract seems to expand the universe of the debtor’s property.
The debtor corporation produced movies. A senior executive had a so-called participation interest of almost 2% in a particular film that turned out to be a hit.
Immediately after filing in chapter 11, the debtor sold all of the assets free and clear under Section 363. Later, we will mention the specific and seemingly conflicting provisions in the purchase and sale agreement.
The executive believed that the sale preserved his participation, but the purchaser didn’t.