FBI Wind Down Inc. v. Heritage Home Grp., LLC (In re FBI Wind Down, Inc.)
| Citation | 557 B.R. 310 |
| Decision Date | 15 September 2016 |
| Docket Number | Adv. Pro. No. 15-51899 (CSS),Case No. 13-12329 (CSS) |
| Parties | In re: FBI Wind Down, Inc. (f/k/a Furniture Brands Int'l, Inc. ), et al. Debtors. FBI Wind Down Inc. Liquidating Trust, By and Through Alan D. Halperin, as Liquidating Trustee, Plaintiff, v. Heritage Home Group, LLC, et al. Defendants |
| Court | U.S. Bankruptcy Court — District of Delaware |
BLANK ROME LLP, Michael B. Schaedle, Victoria A. Guilfoyle (DE No. 5183), 1201 Market Street, Suite 800, Wilmington, DE 19801, Telephone: (302) 425-6400, Facsimile: (302) 425-6464 –and– HAHN & HESSEN LLP, Mark T. Power, Robert J. Malatak, Stephen J. Grable, 488 Madison Avenue, New York, New York 10022, Telephone: (212) 478-7200, Facsimile: (212) 478-7400
RICHARDS, LAYTON & FINGER, P.A., Michael J. Merchant (No. 3854), Robert C. Maddox (No. 5356), One Rodney Square, 920 North King Street, Wilmington, DE 19801, Telephone: (302) 651-7700, Facsimile: (302) 651-7701 –and– PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, Allan J. Arffa, Ross. A. Wilson, 1285 Avenue of the Americas, New York, New York 10019-6064, Telephone: (212) 373-3000, Facsimile: (212) 757-3990
Sontchi
, Bankruptcy Judge
Before the Court is a motion to compel the arbitration of several claims in this adversary proceeding. Heritage Home Group LLC (“Heritage ”), the movant, purchased substantially all of the Debtors' assets pursuant to a Sale Order approved by this Court on November 22, 2013.2 The Second Amendment to the Asset Purchase Agreement (the “Second Amendment ” and the “APA ”) required Heritage and the Sellers to engage in a purchase price reconciliation process in the sixty days after Closing.3 The parties were unable to agree on the proper purchase price reconciliations.4 As a result, the Trustee, as successor-in-interest to the Sellers, filed this adversary proceeding. The Trustee asserts that, under the purchase price reconciliation provisions in the APA, Heritage owes the Liquidating Trust approximately $13,000,000.5 Heritage denies the Trustee's accounting and asserts that the Liquidating Trust owes Heritage approximately $8,000,000.6 The merits of the parties' dispute are not yet under consideration because § 3(a) and § 3(b) of the Second Amendment, which govern the reconciliation process, each contain an Accounting Arbitration Clause (the “Arbitration Clause ”).7
The parties have raised two disputes that might be subject to mandatory arbitration. First, the parties dispute whether Heritage has the right to retain “Auction Clearing House Electronic Receipts & Deposits” (“ACHE-R/D ”) earned by the Sellers shortly before Closing.8 Second, the parties dispute what accounting method—GAAP or the Sellers' traditional practices—must be applied in calculating the purchase price reconciliations.9
Heritage asserts that, under § 3(a) and § 3(b) of the Second Amendment, these disputes must be submitted to the Accounting Arbitrator for resolution.10 In response, the Trustee argues that this Court must first determine several “threshold legal issues” before these claims may be submitted to arbitration.11 The Trustee asserts that the issues raised in his Complaint (1) are outside the scope of the Arbitration Clause and (2) are issues over which the Court expressly retained jurisdiction in the Sale Order.12
The Court interprets the Arbitration Clause as follows: (1) disputes over the calculation of reconciliation items, including disputes over how a set of accounting principles must be applied, are arbitrable while (2) disputes over the interpretation of the APA, including disputes over what rules the APA places on the Accounting Arbitrator, are not arbitrable. The Court has determined that this interpretation is the most reasonable—and only reasonable—interpretation after engaging in a three-step interpretative process.
First, the Court examined the text and structure of the Arbitration Clause to determine what restrictions, if any, limit the scope of the Arbitration Clause. The Court sees two clear restrictions: (1) only disputes relating to the reconciliation provisions of § 3(a) and § 3(b) of the Second Amendment are arbitrable, but (2) not all disputes relating to the reconciliation provisions are arbitrable. Second, the Court determined that because “item” is a term of art in accounting, “any disputed item,” as used in the Arbitration Clause, was a limiting term that restricted the scope of the Arbitration Clause to disputes over “accounting items.” Third, the Court examined whether this interpretation (1) caused conflict with any supporting documents and (2) appeared to be an outcome which two sophisticated parties could reach an agreement on after arms-length negotiation.
Finally, the Court examined the parties' disputes to determine if either dispute falls within the narrow scope of the Arbitration Clause. Because both disputes are clearly disputes over the proper interpretation of the APA, the Court finds that neither dispute is arbitrable. As a result, the Court denies Heritage's motion to compel arbitration.
The United States Bankruptcy Court for the District of Delaware (the “Court”) has subject matter jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(b)
. This adversary proceeding is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). Venue is proper in the Bankruptcy Court pursuant to 28 U.S.C. § 1409(a). This action was brought as an adversary proceeding pursuant to Federal Rule of Bankruptcy Procedure 7001.
Furniture Brands International, Inc. and a number of its affiliates13 filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code on September 9, 2013.14 These cases were procedurally consolidated and jointly administered pursuant to Bankruptcy Rule 1015(b). On the Petition Date, the Debtors filed a motion (the “Sale Motion ”) seeking authorization to sell substantially all of their assets to affiliates of Oaktree Capital Management, L.P. (“Oaktree ”) and approval to enter into an Asset Purchase Agreement between the Debtors and Oaktree (the “Oaktree APA ”).15 The Oaktree APA provided that Oaktree would purchase substantially all of the Debtors' assets for $166,000,000.16 Concurrently, the Debtors also filed a motion (the “DIP Financing Motion ”) seeking entry of interim and final orders authorizing the Debtors to obtain senior secured post-petition financing on a super-priority basis in an amount up to $140,000,000 from Oaktree.17
The Court held the First Day Hearing on September 11, 2013.18 KPS Capital Partners, LP,19 (“KPS ”) appeared at the First Day Hearing and submitted an alternative proposal to provide the Debtors with post-petition financing and to be considered the stalking horse bidder. KPS offered to purchase substantially all of the Debtors' assets for a purchase price of $225,000,000.20 In response, Oaktree substantially improved the terms of its proposal. At the conclusion of the First Day Hearing, the Court entered an interim order approving the DIP Financing Motion with Oaktree as DIP Lender.21
Prior to the entry of a bid procedures order, the Debtors and the Committee negotiated with both Oaktree and Heritage/KPS to obtain better offers for the Debtors' assets. Ultimately, Heritage made a proposal to purchase substantially all the Debtors' assets for a total purchase price of $280,000,000, plus other consideration, and for KPS to provide up to $190,000,000 in DIP Financing.22 On October 2, 2013, the Debtors and Heritage entered into the APA.23
On October 3, 2013, the Court held a hearing on the DIP Financing Motion and the Sale Motion.24 At the conclusion of that hearing, the Court approved the DIP Financing Agreement with KPS and selected Heritage to be the stalking horse bidder in an auction sale for substantially all of the Debtors' assets.25 On November 5, 2013, the parties executed Amendment No. 1 to the APA.26 On November 22, 2013, the parties executed Amendment No. 2 to the APA.27 Later that day, the Court held a hearing on the Sale Order; at the conclusion of that hearing, the Court entered an order approving APA and the Sale (the “Sale Order ”).28 The Sale closed at 12:01 a.m. EST on Monday, November 25, 2013 (the “Closing Date ”). On July 14, 2014, the Court entered an order that: (1) confirmed the Debtors' Second Amended Joint Plan of Liquidation; (2) established the Liquidating Trust; and (3) appointed the Liquidating Trustee to wind down the Debtors' estates.29
The APA, as amended, was designed with a single goal in mind—to transfer the Sellers' operating businesses at a fixed price. As the Trustee explains, achieving such a goal was difficult because “while the Debtors' ‘cash and cash equivalents' remained Excluded Assets, Heritage was acquiring the Debtors' infrastructure and cash management systems, including the Debtors' physical bank accounts.”30 Sections 3(a) and 3(c) of the Amended Asset Purchase Agreement set forth a complex mechanism meant to ensure that the transfer of the Sellers' cash management system did not result in (1) Heritage acquiring any of the Sellers' “Excluded Assets” and (2) Heritage did not assume any more of the Sellers obligations than as bargained for in the APA.
As previously noted, the Sellers' cash and cash equivalents were an “Excluded Asset” being retained by the Sellers. Removing all the cash from the Sellers' Bank Accounts, however, would disrupt ongoing operations and therefore was not a feasible option. Sections 3(a) and 3(c) of the Second Amendment laid out a process to deal with this issue. First, § 3(a) required the Sellers to, at least one business day prior to the Closing Date, submit to Heritage an estimate of (1) the “Closing Cash”31 in the “Acquired Bank Accounts.” Section 3(c) provided that the cash amount payable at the Closing would be increased on a dollar-for-dollar basis by the estimated Closing Cash. These two provisions provided a simple solution to the parties' primary problem. Heritage would acquire...
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Yeransian v. Markel Corp.
...a broad arbitration clause carries a substantial presumption of arbitrability, a narrow clause does not. See In re FBI Wind Down, Inc., 557 B.R. 310, 317 (Bankr. D. Del. 2016), aff'd, No. AP 15-51899 (CSS), 2017 WL 2125757 (D. Del. May 16, 2017). When an arbitration clause is construed as n......