In re American Homepatient, Inc.

• Decision Date: 11 July 2005
• Docket Number: No. 04-5771.,04-5771.
• Citation: 414 F.3d 614
• Parties: In re: AMERICAN HOMEPATIENT, INC., et al., Debtors. Bank of Montreal, for itself and as Agent for AIMCO CDO Series 2000-A, et al., Appellants, v. American HomePatient, Inc., et al., Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

414 F.3d 614

In re: AMERICAN HOMEPATIENT, INC., et al., Debtors.

Bank of Montreal, for itself and as Agent for AIMCO CDO Series 2000-A, et al., Appellants, v. American HomePatient, Inc., et al., Appellees.

No. 04-5771.

United States Court of Appeals, Sixth Circuit.

Submitted: June 9, 2005.

Decided and Filed: July 11, 2005.

ON BRIEF: James R. Kelley, Neal & Harwell, Nashville, Tennessee, Alan Wright, Haynes & Boone, Dallas, Texas, for Appellants. Frank J. Wright, C. Ashley Ellis, Hance, Scarborough, Wright, Ginsburg & Brusilow, Dallas, Texas, Robert J. Mendes, Mendes & Gonzales, Nashville, Tennessee, for Appellees.

Before: SILER and GIBBONS, Circuit Judges; STAFFORD, District Judge.^*

OPINION

STAFFORD, Senior District Judge.

As agent for the senior secured lenders in this bankruptcy case, the appellant, Bank of Montreal, appeals an order affirming the bankruptcy court's determination of the amount of damages resulting from the debtors'/appellees' rejection of an executory contract during Chapter 11 reorganization. We affirm.

I.

Effective May 25, 2001, American HomePatient, Inc. ("AHP"), entered into a credit agreement with certain of its secured lenders, including the Bank of Montreal (collectively, "Lenders"). In connection with the credit agreement, AHP also entered into a warrant agreement ("Warrant Agreement") that called for AHP to issue two series of warrants which, when exercised, would permit the warrant holders to purchase 3,265,315 shares (or 19.99%) of AHP common stock at an exercise price of $0.01 per share. The Warrant Agreement defined "Warrant Holder" to mean "each Lender and thereafter each Person to whom a Lender or other Warrant Holder may transfer any Warrants." J.A. at 816.

On July 31, 2002, AHP and twenty-four of its subsidiaries and affiliates (collectively, "Debtors") filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. The United States Bankruptcy Court for the Middle District of Tennessee ("Bankruptcy Court") confirmed Debtors' Second Amended Joint Reorganization Plan ("Plan") by order entered May 27, 2003. The Plan became effective on July 1, 2003.

Under the Plan, Debtors were authorized to reject executory contracts within ten (10) days after the Plan's July 1, 2003, effective date. On July 11, 2003, Debtors filed a notice of rejection and a motion for an order authorizing Debtors to reject the Warrant Agreement and to quantify the amount of any damages resulting from the rejection of that Warrant Agreement. Debtors argued that the Warrant Holders' damage claim was $0.00 or, alternatively, at most $881,635.05.

The Bank of Montreal (the "Bank"), as the agent for Lenders, filed an objection to Debtors' motion on behalf of Lenders. Among other things, the Bank argued that the Warrant Agreement was not an executory contract subject to rejection. The Bank also took issue with the method used by Debtors to calculate a rejection damage claim.

On November 20-21, 2003, the Bankruptcy Court held a hearing to consider Debtor's motion and the Bank's objection to the motion. In a memorandum decision entered December 12, 2003, the Bankruptcy Court overruled the Bank's objection to Debtors' motion to reject the Warrant Agreement and found the damages stemming from rejection to be $846,369.85. In determining the amount of damages, the Bankruptcy Court relied on sections 365(g)(1) and 502(g) of the Bankruptcy Code to set a rejection date of July 30, 2002, the day immediately prior to the filing of Debtors' bankruptcy petition. In essence, the Bankruptcy Court found that damages should be allowed "in the amount that the Lenders would have recovered as of the time the petition was filed." J.A. at 338. After hearing from each of the parties' experts as to how rejection damages should be calculated, the Bankruptcy Court—consistent with Debtor's expert's testimony—set the price per warrant at $0.02692 (an estimate of the fair market value of shares on the date before the petition was filed), subtracted the warrant exercise price of $0.01 per warrant, then multiplied the difference by the number of warrants (3,265,315) held by Lenders, thus arriving at a damage figure of $846,369.85. An order commemorating the Bankruptcy Court's memorandum decision was entered December 31, 2003.

At the hearing, the experts presented different methodologies for determining damages, resulting in differing estimates as to the amount of those damages. Both experts, however, testified that their rejection damage calculations were based on a pre-petition, July 30, 2002, valuation date. When specifically asked about his selection of a valuation date, the Bank's expert explained that he used the pre-petition date because that was the date provided to him by the Bank's counsel. No evidence was offered at the hearing to support a damages calculation as of any date other than July 30, 2002, the day immediately prior to the filing of Debtors' bankruptcy petition.

After its motion to alter or amend the Bankruptcy Court's December 12, 2003, memorandum decision and December 31 2003, order was denied as to all substantive issues, the Bank appealed to the United States District Court for the Middle District of Tennessee. On May 21, 2004, the District Court entered a memorandum decision and order affirming the decision of the Bankruptcy Court. The Bank then filed its timely notice of appeal in this case.

II.

In reviewing a bankruptcy decision appealed to the district court, "we review directly the decision of the bankruptcy court. We accord no deference to the district court's decision; we apply the clearly erroneous standard to the bankruptcy court's findings of fact, and we review de novo the bankruptcy court's conclusions of law." Brady-Morris v. Schilling (In re Kenneth Allen Knight Trust), 303 F.3d 671, 676 (6th Cir.2002).

III.

A.

The Bank contends that the Bankruptcy Court erred as a matter of law when it used the pre-petition date as the date from which rejection damages were calculated. While conceding that the breach and the resulting contract damage claim are deemed to have arisen on the day before the filing of the bankruptcy case, the Bank maintains that neither section 365(g)(1) nor section 502(g) of the Bankruptcy Code requires that the amount of rejection damages be fixed as of that date. According to the Bank, section 502(g) does nothing more than cause a rejection damage claim to be classified as a pre-bankruptcy unsecured claim.

The Bank, for the first time, raised the issue regarding the valuation date in its pre-trial memorandum filed the morning of the Bankruptcy Court hearing, November 20, 2003. At that time, the Bank suggested that damages should be calculated not from July 30, 2002 (the day before the filing of the petition), but from July 11, 2003, the date Debtors filed both a notice of rejection as well as a motion for order authorizing Debtors to reject the Warrant Agreement. While the Bank offered no expert testimony at the hearing about what damages would be if a July 11, 2003, valuation date were used, the Bank nonetheless argued in its pre-trial memorandum that damages should be calculated by taking the price of shares on the date Lenders learned of the breach (i.e., July 11, 2003), subtracting the warrant exercise price of $0.01 per warrant, then multiplying the difference by the number of warrants held by Lenders, resulting in damages of $6,987,774.10. The Bankruptcy Court rejected the Bank's argument.

Bankruptcy Code section 365(g) provides that, upon rejection of an executory contract, the time of breach by the debtor is fixed as of the day "immediately before the date of the filing of the petition." 11 U.S.C. § 365(g)(1). The effect of the breach is to allow the party injured by the rejection to seek allowance of its resulting claim as a pre-petition unsecured claim. Pursuant to section 365(g)(1), the Bankruptcy Court found that Debtor's breach of the Warrant Agreement occurred on July 30, 2002. The Bank does not contest this finding.

Section 502(g) of the Bankruptcy Code provides that "[a] claim arising from the rejection, under section 365 of this title..., of an executory contract or unexpired lease of the debtor that has not been assumed shall be determined, and shall be allowed under subsection (a), (b), or (c) of this section, or disallowed under subsection (d) or (e) of this section, the same as if such claim had arisen before the date of the filing of the petition." 11 U.S.C. § 502(g) (emphasis added). The language of section 502(g)—providing that a claim for rejection damages "shall be determined, and shall be allowed...as if such claim had arisen before the date of the filing of the petition"—seems clear. See Henry Ford Health Sys. v. Shalala, 233 F.3d 907, 910 (6th Cir.2000) (explaining that a court must "read statutes and regulations with an eye to their straightforward and commonsense meanings"). Webster defines the word "determine" to mean, among other things, "to fix the boundaries of." Merriam-Webster Online Dictionary, at http://www.m-w.com. Webster defines the word "allow" to mean "permit." Id. If, as the Bank argues, section 502(g) does nothing more than cause a rejection damage claim to be classified as a pre-bankruptcy unsecured claim, use of the two words, "determine" and "allow," would be unnecessary. Indeed, the word "allow" would be sufficient to "permit" a rejection damage claim to be classified as a pre-bankruptcy unsecured claim, and the word "determine" would serve no apparent purpose whatever.

Congress, however, chose to include the word "determine" in section 502(g), and we must give effect to that word. See Duncan v. Walker, 533 U.S. 167, 174, 121 S.Ct. 2120, 150 L.Ed.2d 251 (2001) (noting that it is the court's duty "`to give effect, if possible, to every clause and word of a statute'") (quoting United States v. Menasche, 348 U.S. 528, 538-39, 75 S.Ct. 513, 99 L.Ed. 615 (1955) (quoting Montclair v. Ramsdell, 107 U.S. 147,...