In re Applied Safety, Inc.
| Decision Date | 13 September 1996 |
| Docket Number | Bankruptcy No. 95-17950DAS. |
| Citation | 200 BR 576 |
| Parties | In re APPLIED SAFETY, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
COPYRIGHT MATERIAL OMITTED
Thomas Maiorino, Astor Weiss Kaplan & Rosenblum, Philadelphia, PA, for Debtor.
Toby M. Daluz, Philadelphia, PA, for Breed Technologies, Inc.
Barry E. Bressler, Pelino & Lentz, P.C., Philadelphia, PA, for Pelino & Lentz, P.C., Creditor.
Frederic Baker, Ass't. U.S. Trustee, Philadelphia, PA.
Before this court for determination is whether we should confirm the First Amended Plan of Reorganization () of APPLIED SAFETY, INC. ("the Debtor") in the face of the rejecting vote and objections to confirmation of the Plan ("the Objections") filed by Breed Technologies, Inc. ("Breed"). The Plan, proposed by a debtor which has ceased doing business, attempts to realize its only real asset, assertion of legal rights against Breed, financing same by recoveries allegedly due from Breed. Not surprisingly, none of the Debtor's creditors other than Breed oppose the Plan, or would be likely to oppose any plan which presents any glimmer of recovery of their claims. Equally predictable are Breed's vociferous objections to the Plan.
Since the Plan separately classifies Breed, and neither the Debtor nor Breed is willing to commit to Breed's designation as a secured or an unsecured creditor, the Debtor is obliged to establish either that Breed is unimpaired or is unable to preclude confirmation under 11 U.S.C. §§ 1129(b)(2)(A) and 1129(b)(2)(B). As we conclude rather easily that Breed is impaired and that the Debtor cannot meet the requirements of § 1129(b)(2)(A) or § 1129(b)(2)(B), the Plan cannot be confirmed.
Nor, after some reflection, do we think that any plan could be confirmed unless and until the status of Breed's claim is resolved. A hearing on the Debtor's objection to that claim is scheduled on September 18, 1996. In light of the apparent importance of that issue, we will designate that disposition for hearing on a must-be-heard basis.
At this point, prior to that hearing, we are unwilling to conclude that the Debtor could not achieve confirmation of a plan, since the limited record before us presents the prospect that the Debtor could succeed in asserting rights against Breed and in formulating a confirmable plan. However, given that this case is now almost a year old, and that the filing anniversary will probably pass before the status of Breed's claim is resolved, the Debtor will likely receive only one additional clear chance at confirmation before conversion to Chapter 7 will result.
The Debtor filed the instant voluntary Chapter 11 case on October 6, 1995. The filing appears to have been timed to stay a Florida state court suit by Breed seeking recission of a contract providing for the payment of royalties to the Debtor from Breed on sales of retrofit automobile driver's-side air bags on vehicles unequipped with same by their manufacturers. Through the Plan, the Debtor seeks to impose upon Breed the same terms as it alleges are contained in the aforementioned contract. Breed, however, wants to avoid the contract, and asserts, in the Florida litigation, as well as here, that the Debtor has no valid right to collect any royalties from it.
The transcript of the hearing on this motion, incorporated into the instant record, established that the Debtor was formed for the purpose of marketing automotive safety equipment. In particular, the founders of the Debtor wanted to develop and market an air bag devise that could be used to retrofit existing cars with driver's-side air bags. To this end, the Debtor sought out Breed, which manufactured air bag equipment, and convinced it of the viability of developing such a product. Subsequently, on November 8, 1993, the parties entered into a contract designated as a Distribution Agreement ("the Distribution Agreement") giving the Debtor a nonexclusive right to distribute the air bag products which Breed was by this time beginning to manufacture. The Debtor's obligation under the Distribution Agreement was to set up a network of installers to sell the air bags in the consumer market. The Distribution Agreement provided that the Debtor would be paid a commission for each air bag sold, the retail price of which was estimated to be $550 per bag.
Pursuant to the Distribution Agreement, Breed delivered about 2,000 air bags to the Debtor with the understanding that the Debtor would pay for them with proceeds from future sales. Payment was initially due 90 days after delivery. Thereafter, the Debtor began to develop a dealer network and, in fact, did sell about 1,000 of the bags it received, but it was never able to pay Breed for the bags that were already delivered. Breed claimed to be owed in excess of $600,000 for those bags.
In summer 1994, at which time Breed still had not been paid, Breed gave the Debtor notice that it was terminating the Distribution Agreement. The parties then negotiated a new agreement, which is the contract presently at issue, whereby the parties arranged the dissolution of their relationship. This contract, which is designated simply as the "Agreement" but which Breed references, perhaps accurately, by what will be our designation, "the Termination Agreement," requires the Debtor to return all air bags in its possession to Breed in exchange for credit against its debt. Further, the Termination Agreement also requires Breed to pay the Debtor a royalty of $30 for each air bag Breed was later able to sell, half of which was to be retained by Breed and applied toward payment of the Debtor's debt.
Over the next year, the parties' relationship continued to deteriorate, and by summer 1995, Breed filed the above-referenced law suit against the Debtor in a local Florida state court to rescind the Termination Agreement. In that suit Breed claims to have been defrauded by the Debtor because, according to Breed, the Debtor's installer network was based on promises by the Debtor to installers which were not disclosed to Breed and that the Debtor must have known Breed would not be able to fulfill. For instance, the Debtor apparently promised to purchase insurance for the installers against liability for the product, which was not a commitment made by Breed.
Expressing concern that its claims would receive due consideration in a state court proximate to Breed's location, the Debtor responded vigorously to Breed's allegations by pointing out that paragraph one of the Termination Agreement states that Breed will only enter into relationships with dealers which Breed, in its sole discretion, deems to be qualified. Consistent with the tone of paragraph one, the Debtor contends that the Termination Agreement contained no warranties or representations about the nature or quality of the dealer network it was to establish. The Debtor also presented evidence that Breed was in the process of negotiating a distribution agreement with Midas Muffler Corporation ("Midas"), which has a nationwide chain of franchises, to sell and install the air bags in Midas locations for $350 each, which is $200 lower than the price for which Breed previously anticipated selling them. Since the reduced price would render payment of the $30 commission to the Debtor difficult for Breed to fulfill, the Debtor argues that Breed wants to rescind the Termination Agreement primarily to make a prospective contract with Midas economically feasible.
Our Order of March 20, 1996, was based on our recognition of possible merit in the Debtor's claims. Our statements regarding the probable validity of the forum selection clause apparently caused the Debtor to abandon an Application to appoint Leon Silverman, Esquire, as its special counsel to institute an adversary proceeding against Breed in this court. Apparently, the Debtor also decided to attempt to achieve confirmation with its dispute with Breed unresolved, and attempt to establish a mechanism to finance its end of the litigation with Breed through the plan.
As directed, on April 25, 1996, the Debtor filed a plan and disclosure statement. At the initial confirmation hearing of July 10, 1996, the Debtor acknowledged a need to amend the plan to eliminate objections thereto by federal and state taxing authorities, as well as to attempt to resolve certain objections raised thereto by Breed. On July 24, 1996, per an Order of July 11, 1996, the Debtor filed the instant Plan.
The Debtor also filed on that day an objection to Breed's proof of claim in the amount of $303,776.53, asserting both secured and unsecured status. The hearing on that objection was initially scheduled on September 4, 1996. However, due to a vacation of...
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