Restructuring Concepts, LLC’s Randall Reese flagged a recent Delaware bankruptcy decision that addressed this issue in the liquidating Chapter 11 case of Nutritional Sourcing Corporation.
As summarized in Reese’s post:
Nutritional Sourcing and its affiliates operated a chain of supermarkets, as well as a chain of movie and game rental outlets, located in Puerto Rico and the U.S. Virgin Islands. Nutritional Sourcing (but not its affiliated debtors Pueblo International, LLC and FLBN, LLC) previously filed for bankruptcy and the disputes regarding the terms of the Plan largely revolve around the terms of certain financing facilities entered into upon emergence from that prior bankruptcy case. Specifically, certain debt obligations of Nutritional Sourcing (a holding company) were subordinated to obligations owed to trade creditors of its operating subsidiaries. However, the term “trade creditor” was never defined. The Plan distinguished between unsecured claims owed to certain creditors that were defined as trade creditors and the unsecured claims owed to all other creditors, with a significant difference in the proposed recoveries (100% for “trade” claims vs. 13.2% for all other claims).
In a 48-page decision issued Tuesday (12/23), U.S. Bankruptcy Judge Judge Peter Walsh sustained objections from a number of “other” (i.e., “non-trade”) creditors and denied confirmation of the Plan. Citing the “non-discriminatory” and “fair and equitable” confirmation standards of Bankruptcy Code Section 1129(b), Judge Walsh then went on to consider whether or not Plan’s treatment of “trade” and “other” creditors met the classification and treatment standards of Section 1122 and 1123(a)(4).
Critical to this analysis was a construction of the term “trade creditor” arising both under applicable case law and under confirmation-related testimony. The Debtors and the Committee (who also supported the Plan) argued that the term “trade creditor” ought to be construed according to its understood “trade usage” within the grocery industry, and offered evidence to support its proffered construction of the term. Objecting “non-trade” creditors argued that a broader “plain meaning” construction ought to apply to the contract – or, alternatively, that expert testimony must be taken on the understood trade usage.
Judge Walsh’s analysis of the term “trade creditor” is interesting. Despite an acknowledgment that New York law (which controlled the underlying debt obligations at issue) construes unambiguous terms in an agreement within the four corners of the document and without reference to extrinsic evidence, and despite the further observation that “[The term] ‘[t]rade creditors’ [is] not defined [within the debt obligations] most likely because the term ‘trade creditor’ has a commonplace, unambiguous meaning, in New York case law and elsewhere,” Judge Walsh then did exactly the opposite: He employed extrinsic case law and parol evidence to define the term “trade creditor” in this case.
Hmm. Was the term “trade creditor” truly unambiguous to begin with? Or had the Debtors introduced ambiguity by attempting, through the Plan, to retroactively impose a post hoc, “negotiated” definition onto an otherwise commonplace term? Finding that the Plan artificially restricted the term to constitute a “sub-set” of those creditors otherwise commonly understood to be “trade creditors,” Judge Walsh concluded:
The Plan Proponents [have not] convinced me that their proffered trade usage definition of “trade creditor” is widely used in the grocery industry. Rather, I think the term “trade creditor” assumed its commonplace, unambiguous meaning as established by New York and other case law. Accordingly, the . . . in the Plan altered the definition of “trade creditor” as intended by the parties to the [underlying loan obligations], likely to the surprise of many trade creditors.
Judge Walsh then turned to the Debtors’ request for approval of their revised definition as part of a larger settlement. Finding that the term was, indeed, a negotiated one, and that the litigation of such claims would be complex, Judge Walsh nevertheless noted that the financial stakes – an anticipated distribution to general unsecured creditors of $60.8 million – far outweighed the cost of even lengthy, difficult litigation. Moreover, where the negotiating parties all had motivation to restrict the term “trade creditor” beyond that commonly understood in the underlying loan obligations, the compromise’s negative impact on “non-trade” creditors who were not at the negotiating table rendered the “settlement” inequitable – and the Plan unconfirmable.