Opinion
Case No. 02 B 02474.
March 29, 2005
MEMORANDUM OPINION
This matter is before the court on the Motion for Designation as a Critical Vendor and for Other Relief filed by Horizon Lines, LLC, f/k/a CSX Lines, LLC ("Horizon"), as subsequently amended, and upon Kmart Corporation's motion to dismiss Horizon's motion pursuant to Fed.R.Civ.P. 12(b)(6).
BACKGROUND
On January 22, 2002 (the "Petition Date"), Kmart Corporation and thirty-seven of its subsidiaries and affiliates filed voluntary Chapter 11 petitions in this court. On the same day, Kmart filed a motion seeking authority to pay the prepetition claims of certain "critical" trade vendors (the "Critical Vendor Motion"). Kmart also filed motions for authority to pay certain other prepetition claims, including, inter alia, a motion (the "Critical Shipper Motion") seeking authority to pay certain prepetition claims for shipping and delivery charges.
On January 25, 2002, after a hearing, the court entered orders granting, inter alia, the Critical Vendor Motion and the Critical Shipper Motion (the "Critical Vendor Order" and the "Critical Shipper Order," respectively). The Critical Vendor Order was appealed, along with three other Orders, i.e., those granting authority to pay prepetition claims held by Kmart's liquor vendors (the "Liquor Vendor Order") and foreign vendors (the "Foreign Vendor Order") and to honor reimbursement obligations with respect to certain prepetition letters of credit issued for the benefit Kmart's foreign vendors (the "Letter of Credit Order").
The Liquor Vendor Order and the Letter of Credit Order were each entered on February 15, 2002. Several additional orders were entered authorizing, inter alia, the payment of certain customer service providers and consignment vendors, as well as claims for certain wages and prepetition sales, use, trust fund, and other taxes.
Approximately fourteen months later, after the "critical vendors" had been paid over $250 million and on the eve of confirmation of Kmart's plan of reorganization, the Critical Vendor Order, together with the three companion orders, were reversed by the district court. The district court opinion was entered on the docket on April 10, 2003.
The day before entry of that reversal, on April 9, 2003, Horizon filed the instant Motion for Designation as a Critical Vendor and for Other Relief (the "Original Motion"). In the Original Motion, Horizon alleged that on the Petition Date, Kmart sent an e-mail to Horizon, as well as to other shippers and carriers, stating in relevant part as follows:
To Kmart's Carriers and Logistics-Related Service Providers:
. . .
As you may know, Kmart and 37 of its U.S. subsidiaries today filed for reorganization under chapter 11. . . . In our filings . . ., we indicated that we expect to reorganize on a fast-track basis and emerge from chapter 11 in 2003.
Kmart is open for business and focused on providing great service and value to our customers. In order to do that, it is critical that we continue to work with partners like you in the future. Going forward, we will be conducting business as usual by paying under normal terms for goods and services provided by suppliers and vendors during the reorganization. We have secured a $2 billion senior secured debtor-in-possession (DIP) financing facility of which $1.75 billion has been committed. . . .
Additionally, we expect Court approval to pay, at the Company's discretion, for pre-petition services provided by our carriers and other logistics-related service providers. This should give you confidence that we will to [sic] continue to operate on a normal course.
(Original Motion, Exhibit A)
Horizon further alleged that in reliance on the representations made in the e-mail, it continued to perform services for Kmart postpetition. Horizon complains that in spite of its continued postpetition performance, Kmart failed to pay Horizon's prepetition claims or (on information and belief) the prepetition claims of the other carriers to whom the e-mail was addressed. Horizon characterizes Kmart's action as "discriminatory" and also "doubly damaging" to Horizon, because it "deprived [Horizon] of the benefit of having its prepetition claim paid in full, and . . . it substantially diminished by more than $250 Million the `pool' of uncommitted funds in which its unpaid claim could expect to participate." (Original Motion, at 2-3)
Horizon prayed, in the Original Motion, for an order finding that Horizon enjoys "critical vendor" status and directing that its prepetition claim be paid in full. In the alternative, Horizon sought an order vacating the critical vendor orders and directing all recipients to return their payments to this estate.
Kmart filed an objection to the Original Motion, premised largely on the fact that the Critical Vendor Order was permissive, not mandatory. Kmart quoted from paragraph 1 of that order as follows:
The Debtors are authorized, but not directed, in the reasonable exercise of their business judgment, to pay all, a portion or none of the prepetition claims (the "Critical Vendor Claims") of the following "Critical Vendors": (a) Fleming Companies, Inc.; (b) Handleman Company; (c) vendors who supply egg and dairy and (d) certain newspapers, printers, paper suppliers and other vendors who supply goods and services related to the Debtors' advertising program.
(Objection, at 3)
Moreover, since Horizon clearly is not included among the four vendors or categories of vendors listed in the Critical Vendor Order, as quoted above, Kmart suggested that Horizon's motion might be construed as a request for designation under the Critical Shipper Order. Relief under that order would, however, have to be denied for the same reason, i.e., the authority granted was discretionary. The Critical Shipper Order provided in relevant part as follows:
The Debtors are authorized, but not required, to make such payments to the Debtors' . . . shippers . . . as the Debtors determine, in the exercise of their business judgment, are necessary or appropriate in order to obtain release of goods. . . .
(Critical Shipper Order, at 2)
Finally, Kmart asserted in its objection that Horizon's claim of detrimental reliance based on the e-mail communication was meritless, as the e-mail specifically stated that payments would be "at the Company's discretion."
In a reply to Kmart's objection, Horizon alleged for the first time that, in addition to the e-mail set forth above, certain oral statements were made by Kmart representatives which justified Horizon's belief that it would be treated as a critical shipper. Horizon further contended that it was, in any event, beyond the powers of this court to delegate to Kmart the discretion to determine which creditors would be paid on their prepetition claims. (Reply, at 2)
On June 24, 2003, Horizon filed a motion for leave to amend the Original Motion to make it clear that Horizon was seeking relief under any and all of the orders authorizing payment of prepetition claims, including, without limitation, the Critical Vendor Order and the Critical Shipper Order. The motion to amend was ultimately allowed and the amendment filed.
On June 30, 2003, Kmart filed the instant motion to dismiss Horizon's amended motion pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief may be granted. In its motion to dismiss, Kmart again asserted that Horizon's claim is not among those enumerated and described in the Critical Vendor Order and that the order was discretionary in any event. Second, Kmart contended that the Critical Shipper Order, — the only order conceivably applicable to Horizon, — was also discretionary, and it was designed to facilitate the release of goods in transit at the Petition Date, upon which the shipper might assert a possessory lien. Kmart noted in its Motion to Dismiss that Horizon had not asserted a possessory lien on any goods in its possession at the Petition Date, and Kmart appended, in support, a copy of Horizon's timely filed proof of claim. The proof of claim showed a total amount due of $607,451.80, of which $258,507.40 was claimed as secured by virtue of offsetting credits owed to Kmart, — not by reason of any possessory lien, — and the balance was claimed as unsecured. As discussed further below, however, Horizon has since asserted that seventeen shipments were in transit at the Petition Date, for which shipping charges of $63,049.78 were due.
This proceeding, as a contested matter within the purview of Bankruptcy Rule 9014, is automatically subject (unless the court directs otherwise) to certain of the adversary proceeding rules, including, inter alia, Rules 7028-7037, 7052, and 7054-7056. Rule 9014 provides that the court may direct that one or more of the other rules in Part VII shall apply. In this case, Horizon's motion, as amended, is being treated as an adversary complaint, and therefore all the rules of Part VII apply, including Rule 7012 (which makes applicable Fed.R.Civ.P. 12(b)).
With respect to the offsetting credits claimed by Horizon, an order was entered on August 26, 2003, upon the agreement of the parties, allowing the $258,507.40 portion of the claim as a secured setoff claim. The order further allows a balance of $325,000 as a general unsecured claim, without prejudice to Horizon's right to seek payment of that amount pursuant to the Original Motion, as amended. Accordingly, the current dispute concerns the $325,000 balance, which sum includes the $63,049.78 in shipping charges for goods in transit on the Petition Date.
As for Horizon's detrimental reliance claim, Kmart contended, in its motion to dismiss, that the claim must fail because Horizon has not alleged reasonable reliance or damages. Kmart noted that the e-mail sent to Horizon and other carriers specifically stated that payments would be at Kmart's discretion; accordingly, reliance on the e-mail could not have been reasonable. Further, there was no allegation that Horizon had changed its position for the worse in reliance on the e-mail, such as by releasing a possessory lien; it merely continued to provide services postpetition, for which it has been paid in full.
At the time Kmart's motion to dismiss was filed, Horizon had not yet made the allegation concerning its possessory lien on goods in transit, referenced above. On August 27, 2003, Horizon filed a response to Kmart's motion to dismiss, containing a series of additional allegations which, upon the agreement of the parties, are to be considered as part of Horizon's amended motion. One of those additional allegations is that 17 separate shipments of goods were in transit on Horizon vessels on the Petition Date, destined for Kmart's Guam stores, for which the aggregate shipping charges were $63,049.78. Horizon further alleged that it had carried 100% of Kmart's cargo from the continental United States to Guam for a period of six years prior to the Petition Date and that Kmart officials had repeatedly represented to Horizon personnel that the Guam stores were Kmart's most profitable locations. The transportation charges and terms of shipment were governed by published tariffs rather than private agreements. According to Horizon, "[u]nder established law and practice," Horizon held a possessory lien at the Petition Date upon all goods then in transit "as security for all shipping charges due or to become due," said lien being "established and announced in the tariff published by Horizon . . . during the month of September 2000. . . ." (Response, at 3-4)
Horizon's established policy was to immediately cancel all credit terms with respect to any shipper who filed (or against whom was filed) a petition under any chapter of the Bankruptcy Code. Under that policy, the shipper is placed on a "cash list," and Horizon will not release any of that shipper's cargo until "all charges due and to become due are paid in full." Pursuant to this policy, Horizon placed Kmart on its cash list immediately upon learning of the Chapter 11 filing. ( Id., at 4)
Horizon further alleged in its response that on the Petition Date, Kmart did not have sufficient available funds to pay on arrival for the goods then in transit and that enforcement of Horizon's "cash list" policy would have caused serious delay in the receipt of merchandise essential to the Guam store operations. Accordingly, Kmart sent the e-mail "to lull Horizon into a false sense of security" and "to induce Horizon to reinstate normal credit terms." ( Id., at 3-4) Kmart intended that Horizon would, in reliance on the e-mail, waive "its valuable right to insist on prepayment of current freight charges" prior to release of the goods then in transit. Kmart further intended that the e-mail would be taken by Horizon as a "firm commitment" to pay, in exchange for such waiver, all of Horizon's prepetition charges, including those related to goods delivered prior to the Petition Date. Horizon further alleged that in addition to the e-mail, Kmart representatives Robert Garrison and Joelle Carver orally assured Horizon that in consideration of the foregoing waiver, all prepetition charges would be paid in full pursuant to orders entered or to be entered by the court. ( Id., at 3)
According to Horizon, it restored normal credit terms to Kmart the next day, in reliance on Kmart's "written and oral commitment." Horizon alleged that it thereby benefitted Kmart in an amount exceeding that which Horizon presently seeks to recover, because of the damages that would otherwise have been sustained to the Guam store operations. ( Id., at 4)
Finally, Horizon alleged that on June 27, 2002, in further reliance on Kmart's e-mail and verbal assurances, "Horizon included in its Proof of Claim as unsecured debt the sum of $63,049.78 . . . which pursuant to established applicable law was entitled to both secured status because of Horizon's possessory lien and an administrative priority because the debt was actually incurred subsequent to" the Petition Date. ( Id., at 4-5) Horizon noted that in February, 2002, this court entered an order authorizing Kmart to treat as postpetition administrative expenses those debts relating to purchase orders issued prepetition that were satisfied by postpetition delivery of goods or services.
Kmart filed a reply, contending that it cannot be held responsible for Horizon's failure to file a proper proof of claim in this case, since Kmart did not make any representations to Horizon concerning the method of its preparation or its contents. Kmart also contended that Horizon's argument concerning the impermissible delegation by this court of the discretion to determine which shippers would be paid constitutes a collateral attack on the Critical Shipper Order. According to Kmart, Horizon's contention is tantamount to an untimely appeal, since Horizon does not dispute what the order authorized, but only whether the authorization was legally sound.
Horizon was permitted to file a surreply, to which Kmart responded, and oral argument was initially held on January 13, 2004. Counsel for the Post-Effective Date Committee under Kmart's plan ("Committee Counsel") was authorized to, and did, participate in the argument.
Committee Counsel contended at the hearing that Horizon could not obtain the relief it requested under the Critical Shipper Order, because that order only provided authority to pay shipping charges relating to goods in transit subject to a possessory lien, — in this case, $63,049.78. He argued that the order provided no authority to pay prepetition claims relating to goods released to Kmart prior to the Petition Date. (January 13, 2004 transcript, at 128) Horizon, on the other hand, contended that the order was not so limited, but that it authorized payment of shipping charges for goods previously delivered whenever such payment was "necessary or appropriate" to obtain release of goods undelivered as of the Petition Date. (Transcript, at 130; Surreply, at 4) Horizon urged that any other construction would make no sense; "[n]o order of any kind was necessary in order to authorize payment for goods in a shipper's possession, since any such claim would not only be secured but also entitled to administrative priority." (Surreply, at 8, n. 5)
Although at the hearing Kmart appeared to take the same position on this issue as Committee Counsel, Kmart made the following comment in its response to Horizon's surreply: "Horizon suggests that its approximate $325,000 pre-Petition Date unsecured claim (reflected in the proof of claim it filed) should be paid in full (much as it would have had Horizon been given Critical Shipper status). . . ." (Kmart's Response to Surreply, at 4; emphasis added). Kmart also stated that Horizon sought "the treatment afforded to Critical Shippers under the Critical Shipper Order in the hope that its prepetition unsecured claims (for which it filed an unsecured, prepetition proof of claim) will be paid in full (as the Critical Shipper Order provides)." ( Id. at 1; emphasis added) There is nothing in the record to indicate how Kmart interpreted the order in practice, i.e., whether it actually paid prepetition claims for shipping charges relating to goods delivered prior to the Petition Date.
With respect to Horizon's proof of claim and the failure to claim secured or administrative priority status with respect to the $63,049.78 relating to goods in transit, Horizon contended at the hearing that the failure was simply a "mistake." Horizon's counsel further stated that his client assumed that filing the $63,049.78 as unsecured "was the right thing to do since it was already agreed they were going to get paid." (January 13, 2004 transcript, at 120) Counsel contended that the mistake should not be regarded as irreparable, because relief is available under Pioneer Investment Services Co. v. Brunswick Associates Ltd. Partnership, 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993), and its progeny (i.e., on "excusable neglect" grounds).
Over a month after oral argument in this matter, on February 24, 2004, the Seventh Circuit affirmed the district court's reversal of the Critical Vendor Order (and the three companion orders that were appealed). The Court held, inter alia, that § 105(a) of the Bankruptcy Code does not provide authority to order full payment of any unsecured debt unless all unsecured creditors in the class are paid in full. In re Kmart Corp., 359 F.3d 866, 871 (7th Cir. 2004) The Court further held that while authority might be found elsewhere in the Code (i.e., § 363(b)(1)), the record would first have to establish a sufficient benefit to the disfavored creditors (e.g., through a successful reorganization) and the imminent cessation of deliveries by the "critical" vendors unless afforded favored status. Id. at 872-74.
After issuance of the Seventh Circuit's opinion, this court set a status hearing for March 15, 2004, concerning the impact of that ruling on Horizon's motion. At the status hearing, Horizon took the position that the Seventh Circuit's opinion "did not directly affect the critical shipping order," which had not been appealed. Horizon contended that relief could still be granted by this court as prayed in Horizon's amended motion, i.e., "either that Horizon receive favored status or that everybody else be required to disgorge what they received." (March 15, 2004 transcript, at 76-77).
Kmart's counsel stated at the hearing: "I think from Kmart's perspective, and I think Judge Easterbrook said it certainly at the oral argument, . . . this is as much a question of precedent as it is preclusion." (March 15, 2004 transcript, at 79) Counsel explained that whether or not the relevant order was appealed, the "relief that was requested on the first day [i.e., in the Critical Shipper Order] probably falls within the rubric of the standards laid out" by the Seventh Circuit. ( Id., at 80) Counsel further stated that even if Kmart had the ability to grant favored treatment under an order that was not appealed, the fact remained that the order was discretionary. ( Id.)
Over two months after the status hearing, on or about May 27, 2004, Horizon filed a motion for leave to file instanter a "Supplemental Response to Kmart Motion to Dismiss." In the Supplemental Response, Horizon contended that Kmart had inappropriately implied (at the March status hearing) that the Seventh Circuit had in effect reversed the Critical Shipper Order. Horizon attached to its Supplemental Response an unofficial transcript of the Seventh Circuit argument, prepared by Horizon's counsel from the electronic audio recording available on the Court of Appeals website. Horizon noted in its Supplemental Response that the comments made by Judge Easterbrook at oral argument concerning the precedential (as opposed to preclusive) effect of the Court's decision were all made in the context of addressing attempts to avoid disgorgement by recipients of payments under the appealed orders, and not under the Critical Shipper Order (or other unappealed orders).
On June 8, 2004, Kmart filed a response to Horizon's supplemental pleading, emphasizing that it never suggested the Critical Shipper Order had been reversed, but only that this court should consider the Seventh Circuit's reasoning in ruling on Horizon's motion. At the June 15, 2004 hearing on Horizon's motion for leave to file its Supplemental Response, an order was entered upon agreement of the parties that the pleading could be filed and considered by the court, along with Kmart's response thereto.
DISCUSSION
A complaint may not be dismissed under Fed.R.Civ.P. 12(b)(6) unless no relief may be granted under any set of facts that could be proved consistent with the allegations in the complaint. Walker v. National Recovery, Inc., 200 F.3d 500, 503 (7th Cir. 1999). In ruling on the motion, the court must accept as true all facts alleged in the complaint, and it draws all reasonable inferences from those facts in favor of the plaintiff. Jackson v. E.J. Brach Corp., 176 F.3d 971, 977-78 (7th Cir. 1999); Zemke v. City of Chicago, 100 F.3d 511, 513 (7th Cir. 1996). However, the court is not compelled to accept conclusory allegations regarding the legal effect of facts set out in the complaint. Reed v. City of Chicago, 77 F.3d 1049, 1051 (7th Cir. 1996).
As indicated above, the "complaint" for purposes of this motion to dismiss consists not only of Horizon's Original Motion and all amendments thereto, but also the additional facts set forth in its response to the motion to dismiss, its surreply, and its other papers filed herein. As acknowledged by Kmart, all these facts form the factual recitation of Horizon's complaint for purposes of this ruling. (January 13, 2004 transcript, at 101-02)
While the court does not, therefore, have the benefit of addressing expressly designated, separate counts, it is clear that Horizon seeks, based on a number of different theories discussed below, full payment of its prepetition claim or in the alternative, orders vacating the "critical vendor" orders and requiring disgorgement by the recipients of any payments pursuant thereto. It also seeks leave to amend its proof of claim on excusable neglect grounds.
Horizon first attempts to obtain full payment by requiring its designation as a "critical shipper" under the Critical Shipper Order. However, as quoted above, it is clear that the Critical Shipper Order delegated to Kmart the discretion to choose which shippers it would pay. Horizon acknowledges that the order includes this discretionary language, but states: "To this, there are two responses." First, the permissive language of the order "is directly contrary to both the spirit and letter of the statute and therefore should be given no effect." Second, the permissive language "is obviated by Kmart's deliberate postpetition misrepresentations to Horizon and Horizon's detrimental reliance thereon." (Response to Motion to Dismiss, at 7-8)
Horizon's counsel essentially conceded, at oral argument, that the original request for designation under the Critical Vendor Order was made in error. (January 13, 2004 transcript, at 103). Moreover, the other orders cited and described by Horizon appear to be inapplicable to its request.
Horizon expounds upon the first of these two theories by stating that it is "the Court, not the debtor which has the obligation to determine, and enforce, the criteria and standards which are to be invoked before granting of Critical Vendor status to any particular vendor." ( Id., at 7) However, as Kmart correctly observes, Horizon's contention amounts to a collateral attack on the Critical Shipper Order. Horizon does not contest that discretion was granted in the order; it merely contends that the grant of discretion was legally unsound. If Horizon believed that the order was improper, it should have appealed it.
Horizon asserted, in its response to Kmart's motion to dismiss, that the time for appeal of the Critical Shipper Order has not expired, because the "judgment" was never entered as a separate document, as required by Fed.R.Bankr.P. 9021 and Fed.R.Civ.P. 58(a). Kmart, however, countered that even if a separate document were required, that document (if not actually entered) is in effect deemed entered, under the amendments to Rule 58, at the expiration of 150 days from entry of the ruling on the docket. Horizon, while not conceding the issue, has acknowledged that pursuit of its contention concerning the appeal period would be an "uphill fight." (March 15, 2004 transcript, at 77; see also October 28, 2003 transcript, at 44).
Horizon's second theory, i.e., that the order's permissive language is "obviated" by Kmart's deliberate misrepresentations, is equally unavailing. Horizon is correct that the grant of discretion did not "constitute a license to deliberately deceive Horizon to its detriment" (Surreply, at 1). However, nullification of the order's grant of discretion is not an available remedy for any such misrepresentations.
In a similar vein, Horizon contends that it should be granted critical shipper status because Kmart representatives made a "promise" to Horizon, i.e., that in exchange for the waiver of its right to insist on prepayment of $63,049.78 in shipping charges for goods then in transit, Kmart would pay Horizon's prepetition claims in full. Again, however, while Horizon may have a claim for detrimental reliance damages (as discussed further below), designation as a critical shipper is not an available or appropriate remedy with respect to these allegations.
In a final attempt to require designation as a critical shipper, Horizon asserts that Kmart's failure to so designate it, after inducing Horizon to waive its right of prepayment, constituted an abuse of the discretion granted to Kmart in the Critical Shipper Order. Horizon has not cited any case law or other authority establishing a cause of action for (as Horizon phrases it) "abuse of Court-granted discretion." (Surreply, at 2) Horizon cites, in support of its position, cases dealing with the discretion vested in courts, which, when abused, is of course grounds for reversal on appeal. Horizon seeks to extrapolate from these cases, as follows:
A fortiori, abuse by a party of discretion granted by a court — even if such grant was legally permissible — must result in the disapproval of such action and the grant of appropriate relief to any third party prejudiced by such abuse.
(Surreply, at 2) Again, Horizon cites no authority in support of this novel theory, and this court declines to predicate any relief thereon.
Accordingly, even assuming (without deciding) that the Critical Shipper Order did in fact authorize payment of prepetition shipping charges for goods already released to Kmart prior to the Petition Date, Horizon has not alleged a cause of action that could form the basis for such relief in this matter. Moreover, in light of the Seventh Circuit's reversal of the Critical Vendor Order (and the three companion orders) and the reasons therefor, it is doubtful that this court has any authority to grant Horizon's request for designation as a critical shipper at this time.
Horizon notes, however, that the Critical Shipper Order was not appealed and contends that the precedential effect of the Seventh Circuit's decision should not, therefore, prevent the relief now requested. But Horizon cannot attain its desired critical shipper status without further action by this court, and the Seventh Circuit's reasoning with respect to the Critical Vendor Order, applying equally to the payment of prepetition general unsecured claims under the Critical Shipper Order, would seem to prohibit any such action by this court at this time, even if Horizon could surmount the other hurdles to critical shipper designation, discussed above.
Indeed, while Horizon now argues to the contrary, it appears to have conceded this point in its response to Kmart's motion to dismiss, prior to issuance of the Seventh Circuit's ruling. See Response, at 6, n. 5.
Apart from critical shipper designation, however, Horizon appears to independently seek payment of its prepetition claims on a theory of promissory estoppel. Again, Horizon contends that Kmart representatives made verbal "commitments" to Horizon they promised that if Horizon would waive its right to insist on prepayment of $63,049.78 in shipping charges for goods then in transit (and subject to a possessory lien), Kmart would pay all of Horizon's prepetition shipping charges, including those relating to goods previously delivered. Horizon asserts that in reliance on those promises, it released to Kmart the goods then in transit, thereby waiving its right to insist on prepayment.
The court is focusing, for now, on the verbal statements, inasmuch as the e-mail specifically stated that payment would be "at the Company's discretion."
Horizon also asserts that it waived its right to insist on advance payment for future shipments. However, Horizon does not contend that any charges for such shipments remain unpaid.
Assuming that Horizon can prove, inter alia, that the alleged verbal promises were made, that they were unambiguous, and that Horizon reasonably and foreseeably relied on the promises to its detriment, it may be entitled to relief with respect to the resulting injury. See, e.g., Sembos v. Philips Components, 376 F.3d 696, 704 (7th Cir. 2004); Vincent DiVito, Inc. v. Vollmar Clay Products Co., 179 Ill.App.3d 325, 327-28, 534 N.E.2d 575, 577 (1989). Certainly, with respect to the $63,049.78 in current shipping charges, Horizon has sufficiently alleged a cause of action.
Kmart contends, however, that the prepetition shipping charges for goods previously delivered, i.e., the $262,050.22 balance of Horizon's claim, cannot be accorded "detrimental reliance" relief, because Horizon delivered those goods before any of the alleged reliance statements were made. Indeed, as noted above, Horizon appeared to have acknowledged this point in its response to Kmart's motion to dismiss, when it stated (prior to issuance of the Seventh Circuit's ruling):
If [the district court's] Opinion is affirmed and Critical Vendor Status is, therefore, denied to all prepetition claims, Horizon will still be entitled to have the $63,049.78 claim restored to secured and priority status by virtue of its detrimental reliance on the undertakings of Kmart.
(Response to Motion to Dismiss, at 6, n. 5) (emphasis added)
While Horizon thus all but conceded that its detrimental reliance claim was limited to the $63,049.78, it now appears to contend that such claim includes the $262,050.22 balance for goods delivered prepetition, before any of the reliance statements were made. Horizon states in its surreply:
Kmart . . . insists that even if Horizon did rely on Kmart's representations, it fails to allege facts showing harm. That contention is preposterous. Horizon knowingly and willingly traded away its extremely valuable right to insist on prepayment of the $63,000 worth of goods in transit on the Bankruptcy Date. That waiver was worth far more to Kmart than the total shipping costs, both pre and post-petition which Kmart agreed to pay for that waiver, . . . Kmart grabbed the benefits of that waiver, . . . but refused and still refuses to honor its solemn commitment to make the payments [i.e., all prepetition shipping charges]. If that isn't detrimental reliance, what is?
(Surreply, at 6) Horizon's rhetoric merely underscores the infirmities in its position and its apparent inability to articulate detriment as to the $262,050.22 portion of its claim. Rather than identifying an injury that it suffered, Horizon points to the value to Kmart of the waiver of right to prepayment. Horizon alleges that because Kmart "did not have sufficient available funds to pay on arrival" for the goods then in transit, and because Horizon had placed Kmart on its "cash list," Kmart would have incurred, absent Horizon's waiver of right to prepayment, "serious delay and interruption" in the receipt of merchandise at the Guam stores. (Response, at 4) According to Horizon, the "damage that would have been sustained by Kmart to the operation and profitability of the Guam Store(s) if Horizon had persisted in its cash only policy would have been substantially in excess of the amount which Horizon now seeks to recover. . . ." ( Id.)
However, even assuming (purely for the sake of argument) that the waiver had a substantial value to Kmart, that value is not the measure of detriment to Horizon. The only detriment that is clearly alleged by Horizon is the release of its possessory lien (and the concomitant right to prepayment of $63,049.78 in shipping charges) for the 17 shipments of goods in transit.
Again, Horizon also asserts that it waived its right to insist on advance payment for future shipments, but it does not contend that any charges for such shipments remain unpaid.
Perhaps, however, Horizon is suggesting that its "extremely valuable right to insist on prepayment" had some `coercion' value, i.e., as long as Horizon still held onto the goods in transit, it had the leverage necessary to force designation as a critical shipper. Indeed, Horizon contended at oral argument that if, under the Critical Shipper Order, Kmart had merely been able to offer to pay shipping charges for goods then in transit (and not for goods delivered prepetition), the shippers would have "turn[ed] around and go[ne] home." (January 13, 2004 transcript, at 126) Even assuming that any such leverage existed, however, Horizon's alleged "depriv[ation] . . . of the benefit of having its prepetition claim paid in full" would not constitute the detriment necessary to establish Horizon's estoppel claim. Horizon simply did not have a legal right to be designated as a critical shipper or to otherwise obtain full payment of its prepetition claims. See, e.g., In re Kmart Corp., 359 F.3d at 870 (" no creditor acquired rights" under the Critical Vendor Order, because of the grant of discretion contained therein); see also Shields v. Local 705, Int'l Brotherhood of Teamsters Pension Plan, 188 F.3d 895, 901 (7th Cir. 1999) (foregoing a meritless claim causes no detriment).
See Original Motion, at 2.
While it is therefore difficult to conceive how Horizon's detrimental reliance claim could extend to the $262,050.22 in past due shipping charges, the court is reluctant to enter an order granting Kmart's motion to dismiss as to that portion, particularly since an evidentiary hearing will be required in any event as to the $63,049.78.
Moreover, an evidentiary hearing will be required as to Horizon's request to amend its proof of claim. Again, Horizon has asserted that it inadvertently included the $63,049.78 in its proof of claim as an unsecured debt, even though that amount was entitled to both secured and administrative status. It was secured because of Horizon's possessory lien, and it was administrative because the goods, though ordered prepetition, were delivered postpetition.
Kmart does not appear to take issue with the fact that, but for the unsecured designation in the proof of claim, the $63,049.78 would at least have been entitled to administrative priority. Indeed, Kmart appears to have already paid $19,007.96 of this amount. (Response to Surreply, at 5, n. 4) In opposing administrative status, Kmart simply relies on the fact that Horizon failed to designate the $63,049.78 as administrative in its proof of claim.
Again, this court entered an order in February, 2002, authorizing Kmart to treat as postpetition administrative expenses those debts relating to purchase orders issued prepetition that were satisfied by postpetition delivery of goods or services.
If, however, Horizon can prove that the designation as unsecured was made in circumstances warranting relief under Fed.R.Civ.P. 15 and/or Bankruptcy Rule 9006(b)(1), it will be entitled to amend the claim to assert administrative or secured status as to the $63,049.78. Such circumstances may include, inter alia, Horizon's alleged reliance on the verbal "commitments" of Kmart representatives (whether or not Horizon otherwise succeeds on its detrimental reliance claim). Again, however, an evidentiary hearing on these matters is required.
Accordingly, the court will grant Kmart's motion to dismiss with respect to Horizon's request for designation as a critical shipper (or "critical vendor" as defined by Horizon in its amended motion), but will deny the motion in all other respects.
As for the alternate relief requested by Horizon with respect to the critical vendor orders (i.e., vacatur of such orders and disgorgement by the recipients of payments pursuant thereto), it is difficult to imagine how Horizon, — even assuming that its motion to vacate is timely and that it could establish proper grounds, — could be granted the alternate relief it requests. The Critical Vendor Order has already been reversed; it does not need to be vacated. Indeed, Kmart is currently seeking disgorgement through hundreds of adversary proceedings filed under § 549 of the Bankruptcy Code, all as provided in its plan of reorganization. As for the Critical Shipper Order and recovery of payments pursuant thereto, there is no indication that Kmart's plan even reserved the right to bring such recovery actions. Moreover, Horizon itself alleges (on information and belief) that Kmart did not even pay the shippers to whom the Petition Date e-mail was addressed. Accordingly, the alternate relief requested with respect to the Critical Shipper Order appears to be illusory.
CONCLUSION
For all of the foregoing reasons, Kmart's motion to dismiss is granted with respect to Horizon's request for designation as a critical shipper (or "critical vendor" as defined by Horizon in its amended motion) and denied in all other respects. The court will hold a status hearing in this matter on April 20, 2005 at 10:30 a.m. This opinion constitutes the court's findings of fact and conclusions of law in accordance with Bankruptcy Rule 7052. A separate order will be entered pursuant to Bankruptcy Rule 9021.