Fbi Wind Down, Inc. v. Heritage Home Grp., LLC (In re Fbi Wind Down, Inc.)

• Citation: 252 F.Supp.3d 405
• Decision Date: 16 May 2017
• Docket Number: Bank. No. 13-12329 (CSS) Adv. Pro. No. 15-51899 (CSS) Civ. No. 16-834 (SLR).
• 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/Appellee, v. Heritage Home Group, LLC (f/k/a FBN Acquisition Holdings, LLC), et al., Defendants/Appellants.
• Court: U.S. District Court — District of Delaware

252 F.Supp.3d 405

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/Appellee,

v.Heritage Home Group, LLC (f/k/a FBN Acquisition Holdings, LLC), et al., Defendants/Appellants.

Bank. No. 13-12329 (CSS) Adv. Pro. No. 15-51899 (CSS) Civ. No. 16-834 (SLR).

United States District Court, D. Delaware.

Signed May 16, 2017

Michael J. Merchant, Esquire and Robert C. Maddox, Esquire, of Richards, Layton & Finger, P.A., Wilmington, Delaware. Counsel for Appellants Heritage Home Group, LLC f/k/a FBN Acquisition Holdings, LLC, KPS Capital Partners, LP, KPS Special Situations Fund III, LP, KPS Special Situations Fund III (A), LP, KPS Special Situations Fund III (Supplemental), LP, KPS Special Situations Fund III (Supplemental—AIV), LP, and KPS Offshore Investors, Ltd.

Michael B. Schaedle, Esquire and Victoria A. Guilfoyle, Esquire, of Blank Rome LLP, Wilmington, Delaware. Counsel for Appellee FBI Wind Down, Inc. Liquidating Trust, by and through Alan D. Halperin, as Liquidating Trustee.

MEMORANDUM OPINION

ROBINSON, Senior District Judge

I. INTRODUCTION

This is an appeal by Heritage Home Group, LLC, et al. (together, "HHG") from a bankruptcy court opinion (Adv. D.I. 41)¹ ("Opinion") and order (Adv. D.I. 42) ("Order") denying HHG's motion to compel the arbitration of several claims in an adversary proceeding. For the reasons that follow, the court will affirm the Order.

II. BACKGROUND

A. The APA and Sale Order

This appeal arises from the chapter 11 cases of Furniture Brands International, Inc. (together with its subsidiaries, "Debtors"). The following facts appear to be undisputed. The adversary proceeding arose out of the sale by Debtors of substantially all of their assets to HHG pursuant to an asset purchase agreement dated October 2, 2013 (as amended, the "APA") for a fixed price—approximately $280 million, plus HHG's assumption of certain liabilities.² (HHG8 at ¶ 27) Because certain of the assets and liabilities subject to the sale could not be immediately quantified and allocated on the date of the closing, the proposed sale of Debtors' businesses for a fixed price presented certain logistical problems, including two critical issues.³

Cash and Cash Equivalents as Excluded Assets—APA § 3(a). First, HHG was acquiring Debtors' operations with the expectations that it was acquiring a "turnkey" business and that the proposed sale would proceed with no disruption in business operations. To ensure a seamless transition, the APA provided that HHG would acquire Debtors' infrastructure and cash management systems as part of the sale, including taking control of Debtors' physical bank accounts immediately following the closing of the sale on Monday, November 25, 2013, at 12:01 a.m. (See HHG74, § 2.1(a)(iv)) However, the APA also provided that Debtors would retain their "cash and cash equivalents," which assets were excluded from the sale ("Excluded Assets").⁴ (HHG75–77, § 2.2) The parties anticipated that there would be millions of dollars in transit over the weekend prior to closing and that it would not be possible to quantify and allocate the value of the excluded cash and cash equivalents at the moment the sale closed on Monday morning. (HHG11–12, ¶ 41) Specifically, certain cash, bank deposits, wires, and checks in hand ("Cash Amounts in Transit") that were initiated, transmitted, received, or otherwise related to the activity of Debtors prior to the sale closing would not actually hit Debtors' cash management system until after that system came under HHG's exclusive control. (See HHG75–77, § 2.2(a)(x); HHG11–12, ¶ 41)

Similarly, the APA provided that certain outstanding liabilities, including checks outstanding but not yet cleared, incurred by Debtors prior to the closing would remain obligations of Debtors post-closing, but those items also would not hit Debtors' cash management system until after that system came under HHG's exclusive control. (HHG12–13, ¶ 42) In an attempt to address these issues prior to closing, the parties entered into an amendment to the APA ("Amendment No. 2") and established an adjustment mechanism whereby the parties would estimate and then true-up post-closing the "cash and cash equivalents." (See HHG375–76, § 3(a)) This was not a "purchase price adjustment" but rather a "cash component adjustment" meant to ensure that the aggregate purchase price remained fixed at $280,000,000.

Accounts Payable Obligations—APA § 3(b). Second, the parties recognized the potential for significant post-closing disputes over what type of bankruptcy administrative (i.e. , post-petition) expenses constituted "trade payable obligations" under the APA, which obligations HHG had agreed to assume up to a certain cap (with any excess remaining the Debtors' obligation). (HHG15–16, ¶¶ 48–51; HHG372, § 2(e)) These obligations also could not be immediately quantified and allocated between Debtors and HHG at the moment of the closing, given that business operations were continuing before, during, and after the sale. In an attempt to address these issues prior to closing, Amendment No. 2 added the definition of "Accounts Payable Obligations."⁵ Similar to § 3(a), § 3(b) also contained an adjustment mechanism whereby the parties would estimate and then true-up post-closing all Accounts Payable Obligations. (See HHG371–72 & 376, §§ 2(a), 2(e) & 3(b))) Section 3(b), therefore, was designed to handle another difficulty in achieving a fixed purchase price at closing.

Arbitration Provisions. Sections 3(a) and 3(b) of Amendment No. 2 each include an identical arbitration provision,⁶ whereby the parties agreed that any "disputed items" not mutually resolved in connection with the post-closing adjustments would be submitted to an accounting firm for final resolution:

To the extent the parties are unable to come to a final resolution of the foregoing adjustments, the parties shall submit to a mutually acceptable "big four" accounting firm for resolution any disputed items in accordance with the procedures (including allocation of fees and expenses) provided by such accounting firm.

(HHG375–76, §§ 3(a), 3(b) (emphasis added)) On November 22, 2013, the parties executed Amendment No. 2 containing the adjustment mechanisms and arbitration provision discussed above and, later that day, the bankruptcy court entered an order approving the sale and "all of the terms and conditions" of the APA "in all respects." (HHG403, § 4) ("Sale Order") The Sale Order further provided that the bankruptcy court retained jurisdiction over issues of interpretation under the APA:

The Court shall retain jurisdiction to, among other things, interpret, implement, and enforce the terms and provisions of this [Sale] Order and the [APA], all amendments thereto, any waivers and consents thereunder, and each of the agreements executed in connection therewith to which the Debtors are a party or which has been assigned by the Debtors to [HHG], and to adjudicate, if necessary, any and all disputes concerning or relating in any way to the Sale or Transaction.

(HHG429 at ¶ 68 (emphasis added)) Both the Sale Order and APA were heavily negotiated and jointly proposed by the parties. (See HHG706–07; HHG710)

B. Post–Closing Disputes

The sale closed on November 25, 2013. Thereafter, the parties attempted to complete the post-closing adjustments required under Amendment No. 2 but were ultimately unsuccessful with respect to reconciliation of Excluded Assets and Accounts Payable Obligations.

With respect to Excluded Assets, the parties dispute: (1) whether the definition of Cash Amounts in Transit in § 3(a) of Amendment No. 2 includes "Auction Clearing House Electronic Receipts and Deposits" ("ACHE–R/D") earned by Debtors shortly before closing; and (2) whether ACHE–R/D are "cash and cash equivalents" and, therefore, "Excluded Assets" retained by Debtors in the sale. (See HHG21, ¶ 66(a)) In short, Trustee⁷ believes HHG's true-up and adjustment of Cash Amounts in Transit improperly omits ACHE–R/D that constitute cash and cash equivalents retained by Debtors.

Regarding Accounts Payable Obligations, the parties have several disputes. First, the parties dispute whether Debtors' prepayments to vendors should be characterized as (1) a reduction against Accounts Payable Obligations, or (2) an "Acquired Asset" purchased by HHG in the sale. (See HHG21–22, ¶ 66(b)) Second, the parties dispute whether deposits made by customers of Debtors should be treated as (1) a credit against accounts receivables, or (2) Accounts Payable Obligations. (See id. ) Third, the parties dispute whether Accounts Payable Obligations should include expenses "accrued" at the time of closing. (See id. ) With respect to the merits, the parties do not appear to dispute the bankruptcy court's understanding. According to Trustee, the definition of Accounts Payable Obligations in Amendment No. 2 specifically requires a calculation applying the same accounting practices used by Debtors in their ordinary course of business, and that Debtors' long-standing accounting practice was (1) to apply prepayments to vendors as reductions against accounts payable, (2) to credit customer deposits against accounts receivables, and (3) to capture accrued expenses in ledger accounts beginning 23xxx or 24xxx. (HHG25–27, ¶ 78) Trustee asserts that were an arbitrator to apply Debtors' long-standing accounting practice, to which the post-closing mechanisms were meant to conform, the arbitratorwould fully agree with Trustee's calculations. Conversely, HHG believes that GAAP accounting principles must be used to calculate Accounts Payable Obligations, and that applying GAAP: (1) prepayments to vendors are an asset; (2) customer deposits are accounts payable; and (3) accrued expenses are accounts payable. HHG asserts that were an arbitrator to apply GAAP accounting methodology, the arbitrator would fully agree with HHG's...