Summary
finding the determination of whether recoupment continues against a purchaser under section 363 to be a core proceeding
Summary of this case from HHI FormTech, LLC v. Magna Powertrain USA, Inc. (In re FormTech Industries, LLC)Opinion
Case No, 03-13711 (CGC)
March 12, 2004
Laura Davis Jones, Scotta E. McFarland, Curtis Hehn, Pachulski, Stang, Ziehl, Young, Jones Weintraub P.C, Wilmington, DE, Counsel for Debtors and Debtors in Possession
Bennett L. Spiegel, Kelly K. Frazier, Lori Sinanyan, Kirkland Ellis LLP, Los Angeles, CA, Counsel for Debtors and Debtors in Possession
John D, Penn, Haynes and Boone, LLP, Fort Worth, TX, Counsel for American Airlines, Inc.
MEMORANDUM OPINION
Before this Court is The Motion for Limited Reconsideration of Order (A) Approving the Asset Purchase Agreement With Proposed Purchase, (B) Authorizing the (I) Sale of Substantially all of the Debtors' Assets to Savvis Asset Holdings, Inc., Free and Clear of All Liens, Claims, Encumbrances and Interests and (II) Assumption and Assignment of Certain Executory Contracts, License Agreements and Unexpired Leases and Contracts, and (C) Granting Related Relief (Docket No. 556). [Docket No, 665].
BACKGROUND
On December 8, 2003, Cable Wireless USA, Inc., et al, (the "Debtors" or "Cable Wireless") filed avoluntary petition for relief under Chapter 11 of the Bankruptcy Code, The Debtorscontinue to manage its business and affairs as debtor-in-possession pursuant to §§ 1107(a) and 1108 of the Bankruptcy Code,
The Debtors filed a Motion for an Order (A) Approving the Asset Purchase Agreement With Proposed Purchase, (B) Authorizing the (1) Sale of Substantially all of the Debtors' Assets to Savvis Asset Holdings: Inc., Free and Clear of All Liens, Claims, Encumbrances and Interests and (II) Assumption and Assignment of Certain Executory Contracts, License Agreements and Unexpired Leases and Contracts, and (C) Granting Related Relief on December 11, 2003 [DocketNo. 64]. A Notice of Proposed Cure Amounts for Executory Contracts and Unexpired Lease mat the Debtors May Assume and Assign in Connection with the Debtors' Motion to Sell Substantially All of Their Assets was filed on December 23, 2003. And the Courtgranted the Debtors' motion on January 23, 2004 [Docket No. 556].
By motion filed on February 2, 2004, American Airlines, Inc, ("American Airlines") seeks limited reconsideration of the Court's order with respect to American Airlines' pre-petition contract with the Debtors.
JURISDICTION
This Court has jurisdiction over this matter, as a core proceeding, pursuant to 28 U.S.C. § 1334 and 157,
DISCUSSION
American Airlines had a pre-petition contract with the Debtors under which the Debtors provided broad band services. Part of the arrangement provided for the Debtors to collect Texasstate taxes imposed upon American Airlines and pay over the taxes to thestate on American Airlines' behalf American Airlinesalleges that the Debtors overcharged it approximately $1.3 million beyond the taxesthat should have actually been due. American Airlinesstates that it would normally correct this problem by assertinga right of recoupment against future payments due to the Debtors. However, the Debtors have sold substantially all of its assets, including this contract, to Savvis Asset Holdings, Inc. ("Savvis") so there will be no futurepayments. The Debtors did net sell itsrights to seek and receive tax refunds,
The "facts" stated in this Orderare not findings pursuant to Federal Rules of Bankruptcy Procedure 7052. Rather, they are taken from the papers and representations of counsel and are stated to provide a background to American Airlines' objectionand the procedural resolutionset forth in this Order.
Apparently, there is no dispute that someamount was overcharged. The reasonsare murky: American Airlines has preliminarily put the onus on Debtorwhile Debtorasserts that the overcharges onlya rose after American Airlinesrealized that it was entitled to certain exemptions.
American Airlines, therefore, asks for clarification that its right of recoupment continues againstSavvis, citing Folger Adam Security, Inc. v. Dematteis/MacGregor, JV, 209 F.3d 252, 262 (3d Cir. 2000) for the general proposition that "a right of recoupment is a defense and not an interest and therefore is not extinguished by a § 363(f) sale." Forger Adam Security, Inc. v. Dematteis/MacGregor, JV, 209 F.3d 252, 262 (3d Cir. 2000), Savy is counters that allowing American Airlines toenforce recoupment against it would bemanifestly unfair because it would have no ability to mitigate its loss by applying for the taxrefund since it is not the owner of the refund and did notparticipate in the transaction that gave rise to the refund. Debtors counter that this is really a fight between Savvis and American Airlines; Cable Wireless is a liquidating estate with limited resources, has no interest in recovering the refund and should not be burdened with additional administrativecosts,
First of all, while relevant and instructive, Folger does not provide the full answer to this case. Clearly, under Folger, any right to recoupment survived the sale and was notcut off under Section 363(f). However, the Third Circuit made clear that equity and fairness plays a role in easeslike this one. The court expressed concern that allowing contractsto be sold "free of clear" of contractdefenses would enhance thevalue of the assets at the expense of aninnocent party. Id. at 264. The same would happen here if Savvis were required to honor the recoupment claim without a means of recovering the over charges from Texas. In addition, the principals of the buyer in the Folger case were formally associated with the debtors, thereby being charged with knowledge of the potential defenses. That is also not the case here. Here, the appropriate resultis to structure a procedure that protects American Airlines' rights to recover the over charges while at the same lime minimizing additional litigation and unnecessary cost.
Several options present themselves, including:1) preserving American Airlines' right to pursue recoupment againstSavvis, and Savvis' right to contestthat recoupment is appropriate, together with assigning Debtors' and/or American Airlines' rights to seek the refund from Texas to the extent thatSavvis' payments from American Airlines areactually reduced; 2) requiring the Debtors to seek the refund from Texas for the benefit of American Airlines (perhaps less costs and fees incurred), leaving Savvisout of the loop; 3) assigning the Debtors' rights to the refund to American Airlines, leaving both Debtors andSavvis out of the loop.
Number one has the disadvantage of inviting future litigation between Savvis and American Airlines with no corresponding benefit. Number two has the disadvantage of unnecessarily involving the Debtors in a proceeding in which ithas no stake. Thus, of these choices, number three is the most appropriate. American Airlines is theparty that asserts that the taxes were incorrectly calculated and theparty with the knowledge of why that occurred. It is the party that, underany scenario, would have to bear the burden of proving the overcharges." Neither the Debtors nor Savvis"has a dogin this fight," Neither is claiming an interestin the overcharges and neither apparently has any particularly informed knowledge base that would be helpful inestablishing them. The economic benefit of thedispute lies with American Airlines andit is there that the economic burdenof recovering the money, and the control over how to do it, should right fully lie,
Even if American Airlines was simply to withhold payment to Savvis in the amount of the alleged overcharges., a likely result would be a lawsuit from Savvis alleging breach of contract. Recoupment is an affirmative defense to such a claim and the burden would fall on American Airlines to prove it.
CONCLUSION
Therefore, the Court will overrule American Airlines' objection on the explicit condition that the Debtorsassign all of its right in and to any refund for these taxes to American Airlines for American Airlines to pursue as it sees fit. To the extent the Debtors have any documents or files from its relationship with American Airlines that might be relevant to the refund proceeding, it will be required to make such available to American Airlines at a reasonable time and place.
So ordered.