Case BLS Doc 2929 Filed 09/09/15 Page 1 of 14 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE.

Transcription

1 Case BLS Doc 2929 Filed 09/09/15 Page 1 of 14 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: RS LEGACY CORPORATION, et al., Chapter 11 Case No (BLS) (Jointly Administered) Debtors. 1 LIMITED COMMITTEE OBJECTION TO THE ASSUMPTION OF CERTAIN CONTRACTS LISTED AS EXECUTORY IN THE DEBTORS PLAN The Official Committee of Unsecured Creditors (the Committee ) of RS Legacy Corporation and its affiliated debtors and debtors in possession (collectively, the Debtors ), by and through its undersigned counsel, hereby files this limited objection (the Limited Objection ) to the assumption of certain contracts listed as executory pursuant to the Debtors First Amended Joint Plan of Liquidation of RS Legacy Corporation and its Debtor Affiliates (the Plan ) 2 [D.I. 2786] and the supplemental contract lists filed pursuant to the Plan. In furtherance of the Limited Objection, the Committee respectfully represents as follows: 1 The Debtors are the following eighteen entities (the last four digits of their respective taxpayer identification numbers follow in parentheses): RS Legacy Corporation (f/k/a RadioShack Corporation) (7710); Atlantic Retail Ventures, Inc. (6816); Ignition L.P. (3231); ITC Services, Inc. (1930); Merchandising Support Services, Inc. (4887); RS Legacy Customer Service LLC (f/k/a RadioShack Customer Service LLC) (8866); RS Legacy Global Sourcing Corporation (f/k/a RadioShack Global Sourcing Corporation) (0233); RS Legacy Global Sourcing Limited Partnership (f/k/a RadioShack Global Sourcing Limited Partnership) (8723); RS Legacy Global Sourcing, Inc. (f/k/a RadioShack Global Sourcing, Inc. (3960); RS Ig Holdings Incorporated (8924); RSIgnite, LLC (0543); SCK, Inc. (9220); RS Legacy Finance Corporation (f/k/a Tandy Finance Corporation) (5470); RS Legacy Holdings, Inc. (f/k/a Tandy Holdings, Inc.) (1789); RS Legacy International Corporation (f/k/a Tandy International Corporation) (9940); TE Electronics LP (9965); Trade and Save LLC (3850); and TRS Quality, Inc. (5417). The address of each of the Debtors is 300 RadioShack Circle, Fort Worth, Texas Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Plan or the Joint Disclosure Statement of RS Legacy Corporation and its Debtor Affiliates (the Disclosure Statement ) [D.I. 2784].

2 Case BLS Doc 2929 Filed 09/09/15 Page 2 of 14 PRELIMINARY STATEMENT 1. The Committee opposes the Debtors proposed assumption of alleged executory contracts pursuant to Article V, Section C.1 to the Plan (the Debtor Assumed Contracts ), as well as the contracts to be assumed and assigned to the Buyer as TSA Contracts pursuant to Article V, Section C.2 of the Plan (the Buyer Assigned Contracts and collectively, the Potentially Non-Executory Contracts ), without further review by the Committee to ensure any contracts assumed are truly executory. As this Court is aware, the primary source for recovery to unsecured creditors in the case is the Avoidance Actions. However, approval of the assumption of potentially non-executory contracts could severely diminish such recovery, leaving unsecured creditors, inadvertently, with minimal or no recovery at all. To date, the Committee has had a limited opportunity to examine several of these contracts. In each case, the Potentially Non-Executory Contract contained no material obligations left for either party to the contracts to perform and, therefore, are not executory, and incapable of assumption under Section 365 of the Bankruptcy Code 3. Instead of assumption, case law is clear that parties subject to a non-executory contract simply remain bound to such contracts after filing, and no assumption is necessary. As set forth more particularly below, the Committee has grave concerns that many, if not all, of the Potentially Non-Executory Contracts are not executory. Should the Buyer and the Debtors be allowed to assume such non-executory contracts, unsecured creditors could be robbed of their main source of recovery in this case by removing the counterparties to these contracts from the potential defendant pool. 3 All references to the Bankruptcy Code are references to sections of Title 11 of the United States Code unless otherwise noted. 2

3 Case BLS Doc 2929 Filed 09/09/15 Page 3 of Many counterparties to the Potentially Non-Executory Contracts are creditors to whom the Debtors made significant payments within the ninety days prior to the Petition Date (the Preference Period ), and are, therefore, potential defendants to Causes of Action under sections 547 and 550 of the Bankruptcy Code (the Potential Preference Defendants ). The Debtors did not provide vendor numbers or cure amounts with the filed list of Non-Executory Contracts, making it impossible for the Committee to completely analyze the total number of Potential Preference Defendants impacted by these contract lists or the total dollar amount of potential preference liability. 4 However, even without the final list and the minimal documentation requested, the Committee determined it could lose more than $100 million of avoidance claims should the Potentially Non-Executory Contracts be summarily assumed. 3. The Committee recently sent approximately 480 demand letters to vendors paid in the Preference Period. The filed contract list submitted for assumption by the Debtor lists 62 contracts, and the list for assumption and assignment by the Buyer lists 265 contracts, for a total of 327 contracts. The Committee was previously given a working list of contracts that would potentially be assumed, as well as the Debtors then-current guess as to the vendor ID numbers associated with these contracts. At that time, given the incomplete information provided by the Debtors, the Committee was able to cross-reference 155 matches between the working assumption list and the target list for preference vendors. 5 Those 155 vendor matches received payments totaling $93,025, during the Preference Period. Once the Committee is able to cross-reference the currently filed list with the list of vendors receiving demand letters, the total 4 See the Declaration of Edward E. Neiger (the Neiger Declaration ), 8, attached hereto as Exhibit A, which is filed under seal. 5 Neiger Declaration, 8. 3

4 Case BLS Doc 2929 Filed 09/09/15 Page 4 of 14 dollar impact could be dramatically increased. For example, one counterparty 6 on the Debtors current list alone received $530, during the Preference Period. 4. Pursuant to the Sales Order (defined below), the Committee has the right to prosecute all causes of action of the Debtors and their Estates. As detailed in the Plan, on the Effective Date, all Causes of Action including Avoidance Actions will be transferred to the Liquidating Trust for the benefit of the holders of Allowed General Unsecured Claims. 5. Decisions from both this Court and the Third Circuit provide that the non-debtor party to an assumed contract is not subject to a preference action under Section The assumption of these Non-Executory Contracts provides no benefit to the Debtors, and threatens to destroy the main assets available to provide meaningful recovery to general unsecured creditors Accordingly, Committee files this Limited Objection in order to preserve its rights to object to the assumption of any Potentially Non-Executory Contract to the extent it is not executory. For the Committee to have any meaningful review of these intended assumptions, the Debtors must provide for each Potentially Non-Executory Contract: (1) the vendor number of the counterparty; (2) the cure amount; (3) the complete document set of any contract including addendums or proof the parties continued the contract on a month-to-month renewal; and (4) twenty (20) days to object to such assumption. 6 Neiger Declaration, See In re Kiwi Int l Air Lines, Inc., 344 F.3d 311, 323 (3d Cir. 2003) (concluding trustee s preference action precluded by debtor s earlier assumption of agreement with creditor); Guiliano v. Almond Inv. Co. (In re Carolina Fluid Handling Interm. Holding Corp.), 467 B.R. 743 (Bankr. D. Del. 2012) (determining a trustee was estopped from arguing a supply agreement was not executory after it had already been assumed by the debtor). 8 The Committee questions any purported business necessity by the Debtors to assume any Potential Non-Executory Contracts. However, the Court need not even reach the business judgment standard, which only applies to a debtor or trustee s decision to assume or reject an executory contract. There can be no business judgment exception applied to somehow validate the assumption of a non-assumable contract. 4

5 Case BLS Doc 2929 Filed 09/09/15 Page 5 of 14 BACKGROUND A. General Case Background 7. On February 5, 2015 (the Petition Date ), each of the Debtors filed a voluntary petition with this Court for relief under chapter 11 of the Bankruptcy Code. The Debtors are operating their businesses and managing their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. On February 13, 2015, the Office of the United States Trustee (the U.S. Trustee ) for the District of Delaware appointed the Committee. 8. On March 12, 2015, the Court entered an order authorizing the Debtors to obtain postpetition financing and use cash collateral [D.I. 947] (the Final DIP Order ). Under the Final DIP Order, causes of action arising under section 547 of the Bankruptcy Code ( Preference Actions ) are carved-out from the Debtors lenders postpetition liens, preserving the proceeds of Preference Actions for unsecured creditors. 9. On April 1, 2015, the Court entered an order authorizing the Debtors to sell certain assets and perform certain obligations under an asset purchase agreement [D.I. 1672] (the Sale Order ). Under the Sale Order, the Committee was granted authority to commence, prosecute, and compromise all of the Debtors and their estates claims and causes of action [D.I. 1672, 47]. 10. On August 7, 2015, the Court entered an order scheduling a hearing on approval of the disclosure statement and confirmation of the Plan. [D.I. 2757]. Pursuant to this order, any objections to the Plan must be filed by September 9, On August 12, 2015, the Debtors filed their First Amended Joint Plan of Liquidation of RS Legacy Corporation and Its Debtor Affiliates. The Plan, among other things, 5

6 Case BLS Doc 2929 Filed 09/09/15 Page 6 of 14 provides for the treatment of executory contracts and unexpired leases. Under Article V, Section C.1 of the Plan, the Debtor will assume all alleged executory contracts listed on Exhibit V.C to the Plan. Under Article V, Section C.2 of the Plan, the Liquidating Trust shall cause the Debtors to assume and assign certain TSA Contracts and Deferred Assets to the Buyer. Article V, Section C.4 provides the mechanism for the approval of such assumption, and provides that the Confirmation Order shall constitute an order of the Bankruptcy Court approving the assumptions or the assumption and assignment of the contracts listed in Section C.1 and C.2. This section also provides for an objection period for the counterparty to any such contracts to object to the assumption or the cure amounts after the counterparty is provided with notice of 1) the contract to be assumed 2) the cure amount, and the procedures to object. 12. On August 28, 2015, the Debtors filed an exhibit to the Plan containing the Debtor Assumed Contracts, a list of the contracts Debtors intend to assume pursuant to Article V, Section C.1 of the Plan. [D.I ]. That same day, the Debtors filed an exhibit to the Plan containing the Buyer Assigned Contracts, a list of the contracts Buyer intends to have assumed and assigned to it pursuant to Article V, Section C.2 of the Plan. [D.I ]. Both lists provide the counterparty name and description of each contract, but do not provide the vendor ID of the counterparty or alleged cure amount. The Debtors have not provided the Committee with complete copies of all of the contracts on the two lists. The contracts the Debtors provided are mostly old agreements that are no longer in effect and the few that are current have no continuing obligations that would make them executory and, therefore, subject to assumption. LIMITED OBJECTION 13. Under Section 1123(b) of the Bankruptcy Code, a proposed plan may provide for the assumption, rejection, or assignment of a contract, although such treatment must be subject 6

7 Case BLS Doc 2929 Filed 09/09/15 Page 7 of 14 to section 365 of the Bankruptcy Code. Pursuant to Section 365 a trustee, with court approval, may assume or reject any executory contract or unexpired lease of a debtor. This statute deals exclusively with contracts that are executory in nature, and provides no option for the assumption of non-executory contracts. See Steward Foods, Inc. v. Broecker (In re Stewart Foods, Inc.), 64 F.3d 141, 145 (4th Cir. 1995) (noting that a debtor has no right to assume or reject a non-executory contract and instead remains bound by the contracts after filing); In re Exide Tech., 378 B.R. 762 (Bankr. D. Del. 2007) (stating court must undertake analysis of whether contract is executory, as Section 365 does not allow the assumption of non-executory contracts). 14. The Potentially Non-Executory Contracts reviewed by the Committee do not contain material obligations on behalf of both the Debtors and the other party to the contract. Accordingly, the Debtors are prohibited from assuming the same. A. The Bankruptcy Code Contains No Provisions Allowing the Assumption of Non-Executory Contracts 15. Although debtors are allowed to move for the assumption of executory contracts under Section 365, a debtor may not change the nature of a contract from non-executory to executory simply by listing it as an executory contract on an assumption list. See In re Fitch, 174 B.R. 96, 101 (Bankr. S.D. Ill.1994) ( A debtor cannot change the nature of a contract merely be electing to assume it under 365 ); In re Exide, 378 B.R. at (noting a debtor cannot deem a contract executory by placing on an executory contract list). Accordingly, in order to determine whether the Debtors can assume an agreement with a creditor, the central issue is whether the contract in question is an executory contract. 16. The legislative history of Section 365 provided rather wide latitude in the definition of executory; any contract could be executory provided performance were required 7

8 Case BLS Doc 2929 Filed 09/09/15 Page 8 of 14 on both sides. In re Columbia Gas Sys. Inc., 50 F.3d 233, 238 (3d Cir. 1995) (citing H.R.Rep. No. 595, 95th Cong., 1st Sess. 347 (1977)). Courts, however, have generally agreed that such a broad definition would be too wide, and that the word executory would lose meaning. In determining whether a contract is executory and, hence, subject to assumption or rejection, courts in the Third Circuit have relied on the Countryman Test, which provides that a contract is executory when the obligations of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other. Sharon Steel Corp. v. Nat'l Fuel Gas Distribution Corp., 872 F.2d 36, 39 (3d Cir. 1989) (quoting Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn.L.Rev. 439, 460 (1973)). Thus, unless both parties have unperformed obligations that would constitute a material breach if not performed, the contract is not executory under 365. In re Columbia Gas Sys., 50 F.3d at In Delaware, the court first looks to the four corners of the agreement to determine whether there exists material obligations for both parties. In re Exide Technologies, 378 B.R. 762, 766 (Bankr. D. Del. 2007) (citing Shoppers World Community Ctr., L.P. v. Bradlees Stores, Inc. (In re Bradlees Stores, Inc.), 2001 WL , at *8, (S.D.N.Y. September 20, 2001)). To determine whether the remaining obligations are material, the court examines if the terms go to the essence of the contract. Philip Serv. Corp. v. Untz (In re Philip Servs. (Delaware), Inc.), 284 B.R. 541, 547 (Bankr. D. Del. 2002) aff'd, 303 B.R. 574 (D. Del. 2003). The date for analyzing whether material obligations exist for both parties is the petition date. Id. at 240; see also In re Waste Sys. Int'l, Inc., 280 B.R. 824, 827 (Bankr. D. Del. 2002) (noting fact that contract expired on its own terms post-petition did not make it non-executory as of petition date). If the payment of money is the only remaining obligation, such a contract is not 8

9 Case BLS Doc 2929 Filed 09/09/15 Page 9 of 14 executory. Pirinate Consulting Grp. LLC v. Avoca Bement Corp. (In re NewPage Corp.), 517 B.R. 508 (Bankr. D. Del. 2014) (quoting In re Supermedia, Inc., 2014 WL , *3 (Bankr. D. Del. Oct. 9, 2013)); In re Waste Sys. Int l, Inc., 208 B.R. 824, 827 (Bankr. D. Del. 2002). 18. For contracts with an on-going purchase relationship between the parties, courts in the Third Circuit have focused on whether there were minimum purchase requirements or minimum production requirements when determining whether material obligations remained for both parties. For example, in Sharon Steel Corp., the contract in question was a service agreement for natural gas, which had both a minimum consumption requirement on behalf of the debtor and a delivery requirement by the natural gas provider. 872 F.3d at 37. The Third Circuit found the contract was not merely a rate agreement because of the ongoing obligations of both parties to purchase a certain minimum of natural gas at a certain price and to provide natural gas at a certain quantity and price. Therefore, the court found the obligations were material and the contract was executory. See Id. at 39. Similarly, in In re NewPage Corp., 9 the Court found a contract executory where the contract provided that the debtors would purchase, and the vendor would supply, approximately 105,000 tons annually, at approximately 2,000 to 2,200 tons per week. 517 B.R. at 508. Although the Court agreed the terms could have been clearer, it specifically noted if the debtor requested only 50,000 tons per year or the vendor only supplied 50,000 tons per year, the deficient party would clearly be in breach, and, therefore, the terms evidenced material and ongoing obligations of the parties. Id. at 515. See also In re Monroe Well 9 Notably, the NewPage case, as well as several other Delaware cases, have concerned whether preference plaintiffs may pursue defendants after these defendants contracts have been assumed. In several instances the Court has determined, notwithstanding the issue of whether the contract is executory, a plaintiff is barred by collateral estoppel from challenging the nature of an already-assumed contract. That is not the issue in the instant case, as the Committee is making this objection prior to any contract assumption. Thus, the concerns raised in NewPage Corp. and In re Carolina Fluid Handling Intermediate Holding Corp., 474 B.R. 743 (Bankr. D.Del. 2012) are not applicable to the instant case. 9

10 Case BLS Doc 2929 Filed 09/09/15 Page 10 of 14 Serv., Inc., 83 B.R. 317, 320 (Bankr. E.D. Pa. 1988) (determining utility contract was executory where debtor committed to purchase a minimum amount of service and the utility agreed to meet those needs, and further noting that most homeowner utility contracts are non-executory because there is no obligation to continue buying services and the homeowner is free to cancel service at any time ) (emphasis added). 19. The method of determining whether a contract is executory is clear: a court, looking at the four corners of a vendor agreement must determine whether there are specific amounts or requirements on the purchaser side, and specific production requirements on the producer side. Even if the parties have a desire to continuing working together, if the vendor agreement within its four corners does not require them to do so through material obligations, it is not an executory contract, and cannot be assumed. 20. These cases also set forth the treatment of contracts that are non-executory where one party has still not performed. If the non-bankrupt party substantially performed but the debtor did not, the non-bankrupt party becomes a general unsecured party; if the debtor has materially performed and the non-bankrupt parties did not, this is simply an asset of the estate. In re Columbia Gas Sys., 50 F.3d at 239 (citing Thomas H. Jackson, The Logic and Limits of Bankruptcy Law (1986)). Thus when the Court held in Columbia Gas that the settlement contract was non-executory even if the debtors had material obligations, the appropriate remedy was to classify the non-debtor s damages as a general unsecured claim rather than an administrative expense. Id. at 240. B. The Contracts At Issue Are Non-Executory In Nature and Therefore Incapable of Assumption 21. Although the Committee reviewed several contracts to determine whether they were executory in nature, the Neiger Declaration provides as an example the concerns the 10

11 Case BLS Doc 2929 Filed 09/09/15 Page 11 of 14 Committee has with one sample contract (the Sample Contract ). 10 As indicated above, the Committee needs the vendor number of the counterparty, the cure amount, if any, and a complete set of contract documents. 22. The Neiger Declaration describes in detail the reasons the Sample Contract is not executory. Among other things: 23. The Sample Contract vendor is not required to accept any purchase order from the Debtors whatsoever, and the Debtors are not obligated to make any purchases See Neiger Decl., 11. Unlike a requirements contract requiring the vendor to supply all of the product that the debtor would require, or a contract setting forth an approximate annual amount that the debtor was required to buy and the vendor was required to provide, this contract made clear that the Debtors were required to purchase nothing and would not be in breach of the agreement. Similarly, the vendor was required to provide nothing if it did not desire to fulfill the purchase order. 24. On the four corners of this document, the parties were required to have no relationship at all; the parties simply agreed that were they to do business, the terms of the vendor agreement would control. The heart of the agreement governs the terms under which the parties will conduct business; however, zero purchases are required under the contract, and zero fulfillment is required on the part of the vendor. There are no minimums, and there are no requirements that certain product be bought solely from Sample Contract vendor. 25. There is no penalty for termination of the contract simply because either party desires to end the relationship, and the vendor or Debtors merely need to give notice of the 10 The Committee reserves all rights to make further arguments concerning the executory nature of this contract and/or revise its position as necessary. See the Neiger Declaration,

12 Case BLS Doc 2929 Filed 09/09/15 Page 12 of 14 same. See Neiger Decl., 12. Thus as of the petition date, they had the ability to end the contract without penalty to either party. Much like the homeowner who purchases utility services referenced in In re Monroe Well, the Debtors and vendors here were free at any time to discontinue their agreement and were not bound to buy or sell anything. 26. There is nothing material left for either party within the four corners of what amounts to a preferred pricing agreement. The Debtors are clearly not obligated to purchase anything from the vendor at any time. There is no minimum requirements here like contracts cited in In re Sharon Steel or In re Newpage, nor any requirement that the Debtors use the vendor to any agreement as their sole supplier of a given product. The Debtor has no penalty for giving notice to terminate the contract. Such a contract on its face is non-executory and cannot be assumed. CONCLUSION 27. To the extent certain contracts are not executory the Debtors may exercise whatever rights they are already entitled to under the Potentially Non-Executory Agreements without assumption of the same. Were the Debtors to assume these Potentially Non-Executory Contracts and prevent the Liquidating Trustee from commencing preference actions against the Potential Preference Defendants, the general unsecured creditors would lose a significant source of recovery. The assumption of these Non-Executory Contracts would not only be impermissible under Section 365, but elevate these counterparties to undeserved administrative priority status to the detriment of other unsecured creditors. To prevent such loss, the Committee files this Limited Objection to ensure a robust and vigorous review of all Potentially Non-Executory Contracts under the review process described supra. 12

13 Case BLS Doc 2929 Filed 09/09/15 Page 13 of 14 RESERVATION OF RIGHTS 28. The Committee reserves all of its rights, including the right to object to additional provisions of the Plan, which rights are preserved. WHEREFORE, the Committee requests the Court disallow the Debtors request to assume the contracts listed on Exhibit V.C to the Plan and the TSA List without further review of the Committee. Dated: September 9, 2015 Wilmington, Delaware /s/ Christopher M. Samis Christopher M. Samis (No. 4909) L. Katherine Good (No. 5101) WHITEFORD, TAYLOR & PRESTON LLC The Renaissance Centre, Suite North King Street Wilmington, Delaware Telephone: (302) and - COOLEY LLP Jay R. Indyke Cathy Hershcopf 1114 Avenue of the Americas New York, New York Telephone:(212) Facsimile: (212) jindyke@cooley.com chershcopf@cooley.com - and - ASK LLP Edward E. Neiger 151 West 46th Street, 4th Floor New York, NY Telephone:(212) Facsimile: (212) eneiger@askllp.com - and - 13

14 Case BLS Doc 2929 Filed 09/09/15 Page 14 of 14 Joseph F. Steinfeld, Jr. Kara E. Casteel 2600 Eagan Woods Drive, Suite 220 Eagan, MN Telephone:(651) Facsimile: (651) Co-Counsel for the Official Committee of Unsecured Creditors 14

15 Case BLS Doc Filed 09/09/15 Page 1 of 1 EXHIBIT A - FILED UNDER SEAL