Foothill Capital Corp. v. MIDCOM COMMUNICATIONS
| Decision Date | 10 March 2000 |
| Docket Number | No. 99-CV-71661.,99-CV-71661. |
| Citation | 246 BR 296 |
| Parties | FOOTHILL CAPITAL CORPORATION, Plaintiff-Appellant, v. OFFICIAL UNSECURED CREDITORS' COMMITTEE OF MIDCOM COMMUNICATIONS, INC., Defendant-Appellee. |
| Court | U.S. District Court — Western District of Michigan |
Seth D. Gould, Detroit, Michigan, Randall L. Klein, Gerald F. Munitz, Chicago, Illinois, for plaintiff.
Kenneth E. Noble, Lawrence K. Snider, Chicago, Illinois, Jonathan S. Green, Detroit, Michigan, for defendant.
The parties in this bankruptcy appeal essentially dispute whether it was proper for the Appellant, Foothill Capital Corporation ("Foothill"), to receive a prioritized payment of a monetary premium from the debtor, Midcom Communications, Inc. ("Midcom"), under the terms of a pre-bankruptcy financing agreement between these two companies. The Appellees, the Official Unsecured Creditors' Committee of Midcom Communications, Inc. ("Committee"), have sought and subsequently obtained an order from the United States Bankruptcy Court for the Eastern District of Michigan ("Bankruptcy Court"), which compels Foothill to return the premium to Midcom. It is uncontroverted that the premium was payable if and when the financing contract was actually terminated.
This appeal presents two issues that appear to be ones of first impression in this jurisdiction. First, the Court has been asked to determine whether, as a matter of law, a debtor terminates a pre-petition contract for a line of credit when it requests relief under Chapter 11 of the United States Bankruptcy Code ("Code") since 11 U.S.C. § 365(c)(2) prohibits the debtor in possession or trustee from assuming the contract. Parenthetically, a question has also arisen as to whether, as a matter of fact, the contract was terminated by operation of certain contractual terms. Second, it has been argued that Foothill's right to receive the premium was accelerated, as a matter of law, as an allowable contingent claim under 11 U.S.C. § 504(a) or an allowable charge under 11 U.S.C. § 504(b).
In early 1997, Foothill entered into a contract to provide a revolving line of credit of thirty million dollars ($30,000,000.00) to Midcom for a term of three years with the option to renew. (R. 16 Ex. A., ¶¶ 1.1, 2.1, at 15-16, 23.) By the terms of the contract, Midcom's commencement of a bankruptcy case constituted an "Event of Default." (R. 16 Ex. A, ¶ 8.5, at 54.) Moreover, if a default led to a "termination" of the contract at any time before February 27, 2000, Foothill was entitled to recover a premium for the premature act of termination ("early termination premium"), which was to be calculated according to a specified formula.1
On November 7, 1997, Midcom filed a voluntary petition for relief under Chapter 11 of the Code and thereby defaulted on the contract. Even so, with the approval of the Bankruptcy Court, Foothill chose to provide post-petition financing to Midcom. The ostensible purpose of such lending was to help Midcom continue its operations until it could finalize arrangements to have Winstar Communications, Inc. ("Winstar") purchase its assets. On January 21, 1998, Midcom sold a substantial portion of its assets to Winstar for approximately ninety million dollars ($90,000,000.00). Of that sum, more than thirty million dollars ($30,000,000.00), including the early termination premium, was then paid to Foothill.2
Thereafter, the Committee asked the Court to order Foothill to return the early termination premium, arguing that payment of the premium was not proper. Ultimately, following the submission of cross-motions for summary judgment, the Bankruptcy Court agreed with the Committee and entered a summary judgment in its favor and against Foothill on the issue. This resulted in a remittance of the premium by Foothill to the Committee, and the instant appeal followed.
Under 28 U.S.C. § 158(a)(3), "the district courts of the United States shall have jurisdiction to hear appeals . . . with leave of the court, from interlocutory orders and decrees, of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges under section 157 of this title." The parties have deemed the order from the Bankruptcy Court, which grants a partial summary judgment, to be non-final, and Foothill requested leave to appeal. On August 23, 1999, this Court issued an Order, wherein it found sufficient cause to allow the interlocutory appeal. Thus, jurisdiction obtains under § 158.
Since this appeal comes on the heels of the entry of a summary judgment, conclusions of law by the Bankruptcy Court will be subject to de novo review, while disputed findings of fact will be set aside only if they are clearly erroneous. See Unsecured Creditors' Comm. of Highland Superstores, Inc. v. Strobeck Real Estate, Inc. (In re Highland Superstores, Inc.), 154 F.3d 573, 576 (6th Cir.1998) (); Rosinski v. Boyd (In re Rosinski), 759 F.2d 539, 541 (6th Cir.1985) (). Otherwise, the familiar standards that pertain to motions for summary judgment apply. See Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).3
Foothill contends that it should have collected the early termination premium as a secured claim that was prioritized over the unsecured claims of the Committee's members. However, under the contract, the premium was to issue only when the agreement was terminated. Hence, the Bankruptcy Court correctly observed that "the threshold question then is whether the loan agreement was terminated as of the petition date." (R. 18 at 5.)
Foothill first argues that Midcom's act of filing for reorganization invoked 11 U.S.C. § 365(c)(2), which operates to prevent a debtor in possession4 from assuming the loan contract here. It is contended that this prohibition was equivalent to an immediate termination of the loan agreement as a matter of law. Hence, Foothill's contractual right to the early termination premium matured when the petition was filed. In response, the Committee asserts that § 365(c)(2) does not terminate a debtor's prior contracts, but only "precludes a debtor from forcing a lender to provide postpetition financing." (Appellee's Br. at 4.) Hence, it is argued that Midcom's act of filing for reorganization was not a termination, and Foothill's claim for the premium did not mature.
According to the terms of § 365(c)(2), a "trustee in bankruptcy may not5 assume or assign any executory contract6 . . . of the debtor . . . if . . . such contract is a contract to make a loan, or extend other debt financing or financial accommodations, to or for the benefit of the debtor. . . ." The clear implication of this section is that a nondebtor may not be required (by way of contractual assumption) to make new, additional extensions of credit to a debtor that has become insolvent.7 See H.R.Rep. No. 595, 95th Cong., 2d Sess. 348, reprinted in 1978 U.S.C.C.A.N. 5963, 6304 (1978) ( ).
The United States Court of Appeals for the Sixth Circuit (Sixth Circuit), in recognizing this principle, stated that Tully Constr. Co. v. Cannonsburg Envtl. Assocs. (In re Cannonsburg Envtl. Assocs.), 72 F.3d 1260, 1266 (6th Cir.1996) () (quoting 1 Collier Bankruptcy Manual ¶ 365.022, at 14-15 (3d ed.1995)).8 This governing authority tends to counsel that, as a matter of law, a debtor cannot assume a contract that grants it a revolving line of credit because such contracts leave the creditor exposed to demands by the debtor for additional advances of money.9 If this standard is not applied, pre-petition creditors could be legally obligated to forward sums of money to a debtor whose creditworthiness had substantially changed.
In the instant appeal, the loan contract created a thirty-million-dollar line of credit for Midcom. In the absence of the specific provisions of § 365(c)(2), Foothill would have a legitimate concern that the debtor could demand an additional loan under the pre-petition contract.10 This is precisely the circumstance that § 365 was designed to prevent. Hence, Foothill correctly contends that the loan contract is not assumable as a result of the operation of the statute. Moreover, under the Code, each claim against a debtor is ordinarily assumed or rejected.11 See generally NLRB v. Bildisco & Bildisco, 465 U.S. 513, 552, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984) () (quoting 11 U.S.C. § 365(d)(2)).
Foothill maintains that since the loan contract is not assumable, its rejection is inevitable. However, even if the Court accepted Foothill's argument, termination has not necessarily occurred in this case,12 and Foothill's right to collect the premium only matures when termination occurs. See William L. Norton, Jr., 2 Norton Bankruptcy Law & Practice 2d § 39:7, at 39-24 (1999) (...
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