In re Dura Auto. Sys., LLC

• Decision Date: 16 June 2021
• Docket Number: Case No. 19-12378 (KBO)
• Citation: 628 B.R. 750
• Parties: IN RE: DURA AUTOMOTIVE SYSTEMS, LLC, et al., Debtors.
• Court: U.S. Bankruptcy Court — District of Delaware

628 B.R. 750

IN RE: DURA AUTOMOTIVE SYSTEMS, LLC, et al., Debtors.¹

Case No. 19-12378 (KBO)

United States Bankruptcy Court, D. Delaware.

Signed June 16, 2021

MEMORANDUM OPINION ²

Karen B. Owens, United States Bankruptcy Judge

Before the Court is the Motion of Hain Capital Investors Master Fund, Ltd. for Payment of Cure Amount (the "Motion"), in which Hain Capital Investor Master Fund, Ltd. ("Hain Capital") seeks entry of an order compelling Dura Buyer DNA, LLC (together with its assignees, including DUS Operating, Inc. ("DUS"), the "Purchaser") to pay it $1,807,273.03 (the "Cure Amount").³ The Cure Amount represents undisputed amounts owed to Plasti-Paint, Inc. ("Plasti-Paint") arising under executory contracts with the above-captioned debtors (collectively, the "Debtors") that were never assumed or assigned pursuant to this Court's approval during the Debtors' chapter 11 proceedings. Plasti-Paint sold its claims against the Debtors, including the right to the Cure Amount, and continued to provide services to the Debtors during the proceedings and later to the Purchaser after it purchased the Debtors' assets. Hain Capital argues that the executory contracts were impliedly assumed, requiring payment of the Cure Amount. For the reasons that follow, the Court will deny the relief requested in the Motion as the Bankruptcy Code and applicable precedent foreclose the doctrine of implied assumption.

A. JURISDICTION AND VENUE

The Court has jurisdiction over the Motion pursuant to 28 U.S.C. §§ 157(a) and 1334 and the Amended Standing Order of Reference entered by the United States District Court for the District of Delaware on February 29, 2012. Consideration of the Motion is a core proceeding pursuant to 28 U.S.C. § 157(b). Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409.

B. FACTS

On October 17, 2019 (the "Petition Date"), the Debtors sought bankruptcy protection under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Middle District of Tennessee. The cases were transferred to this Court on November 8, 2019⁴ and, on December 15, 2020, converted to ones under chapter 7.⁵

At the time of their bankruptcy filing, the Debtors were a global Tier 1 automotive supply company specializing in the design, engineering, and manufacturing of products that support automotive mobility, including mechatronic systems, exterior systems, and lightweight structural systems.⁶ Since well prior to the Petition Date, the Debtors contracted with Plasti-Paint to paint roof rails. Two purchase orders governed the parties' relationship in addition to general Terms and Conditions. One purchase order governed products and services related to Plasti-Paint's initial painting of the roof rails at its Michigan facility (the "Michigan Contract"). The second governed products and services related to further painting and other related work on the roof rails by Plasti-Paint at its Georgia facility (the "Georgia Contract" and, together with the Michigan Contract and Terms and Conditions, the "Plasti-Paint Contracts").⁷ Rather than issuing a new purchase order every time the Debtors required Plasti-Paint's services, the Plasti-Paint Contracts were blanket purchase orders that allowed for and governed the continual addition of orders on a weekly basis to meet the Debtors' needs. It was agreed by both the Debtors and Plasti-Paint that Plasti-Paint was a critical supplier for the Debtors. As such, it continued to provide services to the Debtors throughout their chapter 11 proceedings.

On June 5, 2020, the Debtors sold substantially all of their North American assets to the Purchaser.⁸ In connection with the sale, the Debtors assumed and assigned to the Purchaser designated executory contracts (the "Transferred Contracts") in accordance with certain Court-approved procedures and section 365 of the Bankruptcy Code.⁹ The Purchaser was responsible for paying all monetary defaults of the Debtors arising or accruing under the Transferred Contracts prior to the closing of the sale.¹⁰ The Debtors did not seek to assume and assign the Plasti-Paint Contracts to the Purchaser. Following the sale, the Debtors did not seek to assume and assign the Plasti-Paint Contracts to another entity or reject them.¹¹

Nonetheless, with the Cure Amount unpaid and the bankruptcy status of the Plasti-Paint Contracts unclear, Plasti-Paint voluntarily¹² continued to provide services to the Purchaser following the sale in accordance with the existing Plasti-Paint Contracts until the early fall of 2020. At that point, Plasti-Paint began performing a modified technical paint process for the Purchaser that was simpler, more efficient, and produced better quality. Pursuant to this new technical process, Plasti-Paint's services were changed and could be performed solely from its Georgia facility. The parties' agreement to implement the modified process was reflected in a new purchaser order dated June 22, 2020 (the "New Contract").¹³ While many terms of the Plasti-Paint Contracts remained unchanged (including the general Terms and Conditions), the New Contract eliminated outdated services and parts, revised the technical process, elongated the Purchaser's payment terms, modified pricing, and replaced the Debtors as contract counterparty with DUS. But for the sale and the substitution of DUS as Plasti-Paint's new contract counterparty, these changes could have been implemented through modifications to the Plasti-Paint Contracts.

While the Debtors and Plasti-Paint began discussing the new process in 2018 and entered into the New Contract in June 2020, Plasti-Paint did not begin performing the process until approximately September 2020 due to lengthy implementation procedures. Until then, it was business as usual under the old Plasti-Paint Contracts.¹⁴ After, the parties transacted under the old and new contracts until December 2020 when the transition to the new process was complete and the parties could operate solely under the New Contract.

On October 26, 2020, Hain Capital filed the Motion. Earlier that year on January 9, 2020, Hain Capital purchased all right, title, and interest in the unsecured claims Plasti-Paint filed in the chapter 11 case against the Debtors arising from the Plasti-Paint Contracts.¹⁵ The purchase entitles Hain to receive all cure amounts that are payable to Plasti-Paint under section 365 to the extent any underlying Plasti-Paint Contract is assumed by the Debtors.¹⁶ An evidentiary hearing on the Motion was held on March 11, 2021.¹⁷ Post-trial briefing was completed on April 22, 2021,¹⁸ and the matter is ripe for adjudication.

C. DISCUSSION

Hain Capital seeks to compel payment of the Cure Amount from the Purchaser pursuant to sections 365(b)(1)(A) and 105(a) of the Bankruptcy Code under the doctrine of implied assumption. It argues that the New Contract is so identical, or at the least, so substantially similar in purpose, to the Plasti-Paint Contracts that this Court should find that the Debtors assumed the Plasti-Paint Contracts by conduct.¹⁹ It is Hain Capital's position that the New Contract is simply a continuation of the Plasti-Paint Contracts and that the parties intentionally structured their dealings to avoid making the Cure Payment to Hain Capital as claims purchaser. Due to these alleged machinations, Hain Capital contends that DUS is now reaping the benefits of the Plasti-Paint Contracts without shouldering its burdens as required by the Bankruptcy Code. Accordingly, Hain Capital seeks this Court to compel the Purchaser to make the Cure Payment.

In opposing the relief, DUS characterizes the relief Hain Capital seeks as extreme, requiring the Court to find implied assumption by the Debtors and then the Debtors' implied assignment to the Purchaser. It contends that these findings cannot be made because formal assumption of the Plasti-Paint Contracts did not occur under the Court-approved procedures and because the doctrine of implied assumption has been rejected in the Third Circuit and beyond. Moreover, even if the doctrine is an available theory, DUS argues that it is not obligated to pay Hain Capital the Cure Amount because the Plasti-Paint Contracts were not assigned to it as Transferred Contracts under the applicable sale order and asset purchase agreement and because the equities do not support it.

Under section 365 of the Bankruptcy Code, an executory contract may be assumed, assumed and assigned to a third-party, or rejected. If a debtor wishes to assume an executory contract, section 365(b)(1)(A) requires it to cure, or provide adequate assurance that it will promptly cure, among other things, the monetary defaults thereunder. Rules 6006 and 9014 of the Federal Rules of Bankruptcy Procedure require any request to assume, reject, or assign an executory contract, other than as part of a plan, to be made by motion, with reasonable notice and opportunity for a hearing afforded to the non-debtor contract counterparty.²⁰ Ultimately, a court must approve the request.²¹

There is no dispute that neither the Debtors sought Court approval to assume and assign the Plasti-Paint Contracts to the Purchaser nor the Court entered an order providing for an assumption and assignment of the contracts. Accordingly, no assumption occurred, and the Cure Amount need not be paid under section 365(b)(1)(A). While Hain Capital argues that the conduct of Plasti-Paint and the Purchaser gives rise to an implicit assumption, the Court of Appeals for the Third Circuit rejected this doctrine in University Medical Center v. Sullivan (In re University Medical Center) , holding that "assumption must be approved. It cannot be presumed."²² While courts outside the Third Circuit have held otherwise,²³ they are in a small minority.²⁴

In University Medical Center , the Third Circuit was tasked with deciding whether formal court approval is a prerequisite to assumption of an executory contract pursuant to section 365 of...