In re Caldor, Inc.-NY

• Decision Date: 22 October 1999
• Docket Number: Bankruptcy No. 95 B 44080(JLG).
• Citation: 240 BR 180
• Parties: In re CALDOR, INC.-NY, The Caldor Corporation, Caldor, Inc.-CT, et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

240 B.R. 180 (1999)

In re CALDOR, INC.-NY, The Caldor Corporation, Caldor, Inc.-CT, et al., Debtors.

Bankruptcy No. 95 B 44080(JLG).

United States Bankruptcy Court, S.D. New York.

October 22, 1999.

COPYRIGHT MATERIAL OMITTED

Kaye, Scholer, Fierman, Hays & Handler, LLP, New York City, for debtors.

Robert E. Michael & Associates, PLLC, New York City, for Pearl-Phil Gmt (Far East) Ltd.

Weil, Gotshal & Manges, LLP, New York City, for Term Loan Holder Committee.

MEMORANDUM DECISION ON APPLICATION OF PEARL-PHIL GMT (FAR EAST) LTD. FOR ORDER AUTHORIZING AND DIRECTING PAYMENT OF ADMINISTRATIVE EXPENSE CLAIM

JAMES L. GARRITY, Bankruptcy Judge.

Pearl-Phil Gmt (Far East) Ltd. ("Pearl"), one of a group of 18 asian vendors that manufactured goods to the specification of The Caldor Corporation and its debtor affiliates (collectively, "Caldor" or "debtors") during the pendency of these chapter 11 cases, seeks an order allowing as an administrative expense and directing Caldor to pay in full its claim for damages arising from Caldor's repudiation of certain post-petition contracts for the production of merchandise. Debtors, whose estates are administratively insolvent, and a committee consisting of their term loan holders (the "Term Loan Holder Committee") oppose the application. On August 11 and 12, 1999, we conducted an evidentiary hearing on Pearl's application. For the reasons stated herein, we deny it.

Facts

The facts are not disputed unless noted otherwise. Each debtor filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code on September 18, 1995. They have remained in possession of their assets and businesses since that time pursuant to §§ 1107 and 1108 of the Bankruptcy Code.

Debtors' estates are administratively insolvent. Pursuant to an application dated on or about January 22, 1999, and an order to show cause returnable January 22, 1999, they sought authority to wind-down their businesses in chapter 11 by means of a program intended to effect an orderly liquidation of their businesses while maximizing recoveries on their assets for the benefit of their creditors. In advance of the hearing on the January 22 application, debtors served copies of the application and order to show cause on the committee of creditors appointed herein, Caldor's term debt and real estate lenders, Caldor's post-petition lender, the equity committee appointed herein and the United States Trustee.

On January 22, 1999, we conducted an evidentiary hearing on debtors' application. During that hearing we found that Caldor's creditors would be best served by implementing the proposed program rather than by converting these cases to chapter 7, and we issued an order (the "Wind-Down Order") that, among other things, authorized Caldor to wind down its business operations and affairs, conferred super-priority administrative status upon post-petition claims arising during the wind-down period, and established a bar date for the filing of claims which arose during the post-petition period during which Caldor was operating.

Pursuant to the Wind-Down Order, and to facilitate Caldor's wind-down program, we bifurcated administrative expense claims into "Operating Period" claims (i.e. those that arose between September 18, 1995 and January 22, 1999) and "Wind-Down Period" claims (i.e. those that arose on or after January 23, 1999). In doing so, we in substance conferred super-priority administrative expense status upon Wind-Down Period claims and directed that they be paid in full, and prohibited Caldor from paying Operating Period claims. This prohibition of payment expressly includes payments to "vendors and suppliers for goods and services provided during the Operating Period." Wind-Down Order p. 5.

The Wind-Down Order established March 31, 1999 as the bar date for the filing of all Operating Period proofs of claim (the "Operating Period Claims Bar Date"). In accordance with the terms of the order, Poorman-Douglas Corporation, Caldor's court-appointed claims agent, served the Wind-Down Order, Caldor's January 22, 1999 application, notice of the Operating Period Claims Bar Date and the stay of payments, and a proof of claim form, by mail within ten days of entry of the order, upon all creditors believed by Caldor to hold claims which arose during the Operating Period. Caldor also published notice of the Operating Period Claims Bar Date at least 30 days prior thereto in Womens' Wear Daily and The New York Times.

Among other things, the Wind-Down Order provided that a hearing would be held on February 5, 1999 to consider Caldor's application for an order approving, among other things, a term debt agreement between debtors and their term lenders, which permitted Caldor to pay ordinary course obligations arising on or after January 23, 1999. The Wind-Down Order expressly provided that, notwithstanding the entry of that order, interested parties could file objections to debtors' January 22 application and the relief granted in the Wind-Down Order no later than three business days prior to the February 5 hearing.

Several parties timely filed objections.¹ At the February 5, 1999 hearing and in accordance with the express terms of the Wind-Down Order, we allowed any party objecting to the relief granted in the Wind-Down Order to be heard, in effect affording them an opportunity to seek relief from the Wind-Down Order, free from the strictures governing a motion for reargument or reconsideration. See Transcript of February 5, 1999 Hearing 31:9-14, 36:11-37:5, 41:3-42:7. On February 8, 1999, we issued an order (the "February 8 Order") approving Caldor's application in so far as it concerned the agreement with its term lenders, and reaffirming in all relevant respects the terms of the Wind-Down Order. That order was based upon, among other things, our findings that it is in the best interests of all creditors to liquidate debtors' estates under chapter 11 and that it is unreasonable to expect persons who supply goods and services during the Wind-Down Period to do so without granting them a superpriority status. See Transcript of February 8, 1999 Hearing ("2/8 Tr.") 18:8-22. By way of reconsidering the relief granted pursuant to the Wind-Down Order, we considered and overruled each of the objections that were interposed in timely fashion. Id. 24:17-21. We predicated our determinations in that regard upon §§ 364(c)(1) and 1112(b) of the Bankruptcy Code.

In accordance with the Wind-Down and February 8 Orders, Caldor implemented a wind-down program involving the sale of store inventory through going-out-of-business sales, and the sale, assignment or disposition of substantially all of its leasehold and fee interests in real estate. It has also terminated all merchandising staff and nearly all employees involved in its import operations. No one disputes that by means of that program Caldor realized significantly more on its assets than it would have realized had these cases been converted to chapter 7 liquidations.

Caldor was party to a Buying Agency Agreement dated April 20, 1990, as amended (the "Buying Agency Agreement"), with Swire and Maclaine Ltd. and Beldare Enterprises, Ltd. (collectively, "Swire"), whereby Swire acted as Caldor's exclusive agent in procuring contracts for the production of goods in Asia. Post-petition, Swire continued in that capacity. Caldor's obligations to Swire under the Buying-Agency Agreement are secured by a stand-by letter of credit (the "Caldor/Swire 1/c"). Pearl is one of the asian vendors engaged by Swire on behalf of Caldor during these cases to manufacture goods. Its contracts arise from three purchase orders that Caldor issued post-petition through "worksheets" dated on or about May 28, 1998. Swire communicated these orders to Pearl in purchase advices that it issued between December 17, 1998 and January 8, 1999. In the event of nonpayment under the contracts with Caldor, Pearl had the right to draw on a letter of credit posted by Swire. The purchase orders provided for delivery to Caldor's international freight consolidators, Cargo System USA, Inc. ("Cargo"), in March of 1999, which lead time was customary for goods to be manufactured in Bangladesh. See Transcript of August 11-12, 1999 Hearing ("8/11 Tr.") 37:18-22.

Caldor stopped accepting delivery of domestic goods on or about January 5, 1999. It informed Swire of this on January 7, at the same time indicating to Swire that foreign vendors could be told that Caldor's "prospects are uncertain". Id. 30:12-17. By a memorandum dated on or about January 12, 1999, Swire's Managing Director Fred Chin instructed Swire personnel to notify foreign vendors to take all steps possible to halt production of goods, except goods whose production had proceeded so far that it was too late to stop:

I AM ISSUING THE FOLLOWING GUIDELINES TO ALL OFFICES TO FOLLOW:

1. THE FACT THAT CALDOR HAVE ASKED WHICH OUTSTANDING ORDERS CAN BE CANCELLED APPEARS TO INDICATE LITTLE CHANCE OF OUR STAND-BY L/C BEING INCREASED. UNDER THE CIRCUMSTANCES WE SHOULD ADVISE VENDORS: "CALDOR\'S WAREHOUSE HAS STOPPED RECEIVING GOODS FROM DOMESTIC SUPPLIERS AS THEY CANNOT PAY FOR THEM. HOWEVER, THIS DOES NOT APPLY TO OVERSEAS DIRECT IMPORTS ON AN L/C BASIS." (ONLY TELL VENDORS WHAT IS IN QUOTES).

2. "AS CALDOR\'S ABILITY TO CONTINUE BUSINESS GOING FORWARD IS MOST UNCERTAIN" (WE CAN TELL VENDORS THIS), THEN OUR ADVICE IS:

—HOLD PRODUCTION ON ANY FALL 99 ORDERS IMMEDIATELY.

—ON SPRING 99 ORDERS, IF GREIGE GOODS OR RAW MATERIAL (IN THE CASE OF HARDLINES) HAS NOT BEEN ORDERED THEN DON\'T ORDER. IF GREIGE GOODS HAVE BEEN ORDERED BUT NOT YET DYED UP THEN HOLD. IF PIECEGOODS HAVE BEEN DYED UP BUT NOT YET CUT, DO NOT CUT. IF PIECEGOODS HAVE ALREADY BEEN CUT OR IF GOODS ARE ALREADY BEING SEWN OR MADE UP, THEN OBVIOUSLY ITS TOO LATE TO STOP.

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Between January 13 and 15, 1999, Caldor instructed Swire to cancel all foreign vendor purchase orders which could be canceled without...