In re ASPC Corp.

• Decision Date: 10 May 2019
• Docket Number: Case No. 18-52736
• Citation: In re ASPC Corp., 601 B.R. 766 (Bankr. S.D. Ohio 2019)
• Parties: IN RE: ASPC CORP., f/k/a AcuSport Corporation, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

601 B.R. 766

IN RE: ASPC CORP., f/k/a AcuSport Corporation, Debtor.

Case No. 18-52736

United States Bankruptcy Court, S.D. Ohio, Eastern Division, at Columbus.

Signed May 10, 2019

Thomas R. Allen, Allen Stovall Neuman Fisher & Ashton LLP, Columbus, OH, Jason Jon DeJonker, Bryan Cave Leighton Paisner LLP, Chicago, IL, for Debtor.

Thomas R. Fawkes, Harold Israel, Brian J. Jackiw, Goldstein & McClintock LLLP, Chicago, IL, Douglas L. Lutz, A.J. Webb, Frost Brown Todd LLC, Cincinnati, OH, for Creditor Committee.

OPINION AND ORDER ON ELLETT BROTHERS, LLC'S NOTICE DESIGNATING THE DEBTOR'S DISTRIBUTOR AGREEMENT WITH SMITH & WESSON CORP. FOR ASSUMPTION AND ASSIGNMENT (DOC. 240)

John E. Hoffman, Jr., United States Bankruptcy Judge

I. Introduction

This case pits Chapter 11 debtor ASPC Corp. (the "Debtor") and the Official Committee of Unsecured Creditors (the "Committee") against firearms manufacturer Smith & Wesson Corp. ("S & W") and one of S & W's distributors, Ellett Brothers, LLC ("Ellett"). Earlier in the case, Ellett entered into an asset purchase agreement with the Debtor (the "APA") for the primary purpose of purchasing the Debtor's real estate and information technology assets, including related contracts and leases. After the Court entered an order approving the APA (the "Sale Order") and the sale closed, Ellett filed a notice designating the Debtor's firearms distribution agreement with S & W (the "Distributor Agreement") as a contract to be assumed by the Debtor and assigned to Ellett under the APA and the Sale Order. S & W supports the designation of the Distributor Agreement for assumption and assignment. The Debtor and the Committee, however, oppose the designation while decrying the unusual manner in which it was made. Ellett, which was a party to its own distribution agreement with S & W, never expressed any interest in the Distributor Agreement or similar agreements with other manufacturers during the negotiations over the APA. In fact, even after S & W pressured Ellett to designate the Distributor Agreement for assumption and assignment shortly before the sale hearing, Ellett resisted, relenting only after S & W agreed to reimburse it for the attorneys' fees and expenses it would incur in connection with the designation and to give it more than $ 155,000 of additional value. S & W agreed to these concessions for one primary reason: it intends to interpose the assumption and assignment of the Distributor Agreement as a complete defense to the $ 4.2 million preference claim that the Debtor has asserted against it.

The Debtor and the Committee contend that the elimination of a multimillion-dollar preference claim is reason enough for the Court to decline to approve the assumption and assignment of the Distributor Agreement.

For their part, S & W and Ellett insist that the consequences of the assignment are irrelevant because the APA afforded Ellett the absolute right to decide which executory contracts would be assumed and assigned. In response, the Debtor and the Committee argue that the APA should not be interpreted to have bargained away the Debtor's business judgment and that the Distributor Agreement cannot be assumed and assigned in any event because it is not an executory contract.

For the reasons explained below, the assumption and assignment of the Distributor Agreement cannot be approved even though it is indeed an executory contract that Ellett at one time had the unfettered right to designate for assignment. Under the terms of the APA, Ellett had this right only up until two days before the closing. Ellett, however, failed to designate the Distributor Agreement for assignment before the deadline. And, as the Debtor and the Committee point out, the Sale Order included a provision negotiated by the parties that carved the Distributor Agreement out of the APA's process for assuming and assigning contracts. Under this agreed provision, Ellett's designation of the Distributor Agreement for assumption and assignment was subject to the rights of parties in interest to object "for any reason, including, but not limited to, challenging whether the [Distributor Agreement] is a contract that can be assumed and assigned under section 365 of the Bankruptcy Code."

In light of this agreed provision, S & W and Ellett are left to argue that the phrase "for any reason" does not mean what it says, but instead essentially means "for any reason that a party in interest could have objected if Ellett had designated the Distributor Agreement for assumption and assignment within the time period originally contemplated by the APA." This argument is unpersuasive. It is not, after all, a court's role to add language to an agreed order that simply is not there, and the language that is used in the Sale Order unambiguously permits the Debtor and the Committee to object to the assumption and assignment of the Distributor Agreement on the grounds they have asserted. Moreover, even if the Sale Order were ambiguous in this regard, extrinsic evidence demonstrates that the "for any reason" language of the Sale Order was intended to encompass the objections raised by the Debtor and the Committee. In the end, it is clear that the assumption and assignment of the Distributor Agreement would harm the bankruptcy estate in a significant way and that the Debtor's and the Committee's objections to the assumption and assignment accordingly must be sustained.

II. Jurisdiction and Constitutional Authority

The Court has jurisdiction to hear and determine this contested matter under 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(A) & (O). Because a dispute over the assumption and assignment of an executory contract "stems from the bankruptcy itself," the Court also has the constitutional authority to enter a final order in this matter. Barbara Capital Lofts, LLC v. Jaytee LLC (In re Jaytee LLC) , No. 16-00723, 2017 WL 1653153, at *3 (Bankr. N.D. Ill. May 1, 2017) (quoting Stern v. Marshall , 564 U.S. 462, 499, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) ). Further, the adjudication of the parties' dispute turns on the meaning of the Sale Order and the APA, which the Court has the constitutional authority to interpret and enforce. See Trusky v. Gen. Motors Co. (In re Motors Liquidation Co.) , No. 12-09803 (REG), 2013 WL 620281, at *12 (Bankr. S.D.N.Y. Feb. 19, 2013) ("I plainly have the constitutional power, even after [ Stern v. Marshall ], to interpret and enforce my Sale Order, and the underlying agreements which I authorized in connection with that order[.]").

III. Procedural Background

On May 1, 2018 (the "Petition Date"), the Debtor, which was then known as AcuSport Corporation, filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. Just two months later, on June 29, 2018, the transactions authorized by the Sale Order closed. Ex. 10 (notice of closing). The Sale Order (Ex. 5) established deadlines for Ellett to designate the Distributor Agreement for assumption and assignment and for any party in interest to object to the designation. Ellett timely filed a notice designating the Distributor Agreement for assumption and assignment (the "Notice of Designation") (Ex. 13). The Debtor and the Committee timely filed objections to the Notice of Designation. Exs. 14 & 15, respectively.

In accordance with the procedures set forth in the Sale Order, the Court entered a scheduling order (Ex. 17, Doc. 369) establishing a briefing and discovery schedule and setting an evidentiary hearing on the Notice of Designation. Pre-hearing briefs were filed by the Debtor ("Debtor's Pre-Hr'g Br.") (Doc. 384), S & W ("S & W's Pre-Hr'g Br.") (Doc. 385), the Committee (Doc. 388), and Ellett (Doc. 389). The parties also submitted declarations in support of their positions. S & W submitted the declaration of Deana McPherson (the "McPherson Declaration") (Doc. 386), who is the chief accounting officer and corporate controller of American Outdoor Brands, the parent company of S & W. McPherson Decl. ¶ 1. Ellett filed the declaration of Bradley P. Johnson (the "Johnson Declaration") (Doc. 389, App. I), who is the chief executive officer and chairman of the board of directors of United Sporting Companies, the parent of Ellett. Johnson Decl. ¶ 1. The Debtor offered several declarations: the declaration of James Broering (the "Broering Declaration") (Debtor's Pre-Hr'g Br., Ex. B), the president and chief operating officer of the Debtor; the declaration of Lee Sweigart (the "Sweigart Declaration") (Id. , Ex. D), its chief restructuring officer; and the declaration of Geoffrey Frankel (the "Frankel Declaration") (Id. , Ex. E), the professional at Huron Transaction Advisory ("Huron") who provided the Debtor with investment-banking services in connection with the sale of its assets to Ellett.

The parties agreed during the evidentiary hearing on the Notice of Designation that the declarations filed before the hearing would be admitted into evidence and considered by the Court in lieu of direct testimony, but that Mr. Johnson would be permitted to provide additional direct testimony. See Doc. 451 (the "Transcript") at 7–11, 150. The Court then heard the testimony of Ms. McPherson and Messrs. Frankel, Broering, Sweigart, and Johnson. The parties also offered documentary evidence. Exhibits 1–23 of Ellett and S & W were admitted into evidence without objection, as were the following exhibits of the Debtor and the Committee: Exhibits A, D–F, H–U, Y, Z, and AA.¹ Id. at 185–87. In addition, for the reasons stated on the record, emails sent by Sue Cupero (who was an employee of S & W) to Mary Grim (who was an employee of the Debtor) contained in the Debtor's and the Committee's Exhibits W and X were admitted into evidence over the objections of Ellett and S & W, but the emails from Ms. Grim to Ms. Cupero contained in those exhibits were not admitted. Id. at 156–64. The deposition...