In re Meridian Auto. Sytems-Composites Operations

• Decision Date: 23 August 2007
• Docket Number: No. 05-11168 (MFW).,05-11168 (MFW).
• Citation: 372 B.R. 710
• Parties: In re MERIDIAN AUTOMOTIVE SYTEMS-COMPOSITES OPERATIONS, INC., et al., Debtor.
• Court: U.S. Bankruptcy Court — District of Delaware

372 B.R. 710

In re MERIDIAN AUTOMOTIVE SYTEMS-COMPOSITES OPERATIONS, INC., et al., Debtor.

No. 05-11168 (MFW).

United States Bankruptcy Court, D. Delaware.

August 23, 2007.

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Robert S. Brady, Esquire, Edward J. Kosmowski, Esquire, Edmon L. Morton, Esquire, Young Conaway Stargatt & Taylor, LLP, Wilmington, DE, for Meridian Automotive Systems-Composites Operations, Inc.

James F. Conlan, Esquire, Larry J. Nyhan, Esquire, Paul S. Caruso, Esquire, Bojan Guzina, Esquire, Sidley Austin LLP, Chicago, IL, for Meridian Automotive Systems-Composites Operations, Inc.

Gregg M. Galardi, Esquire, Mark Desgrosseilliers, Esquire, Kristhy M. Peguero, Esquire, Skadden, Arps, Slate, Meagher & Flom, LLP, Wilmington, DE, for Plastech Engineered Products, Inc.

OPINION¹

MARY F. WALRATH, Bankruptcy Judge.

Before the Court is the Motion of Meridian Automotive Systems, Inc. ("Meridian") to Compel Compliance with the Terms of the Critical Vendor Order's by which Meridian seeks an order compelling Plastech Engineered Products, Inc. ("Plastech") to disgorge $1.25 million which it received under the Critical Vendor Orders. Plastech opposes the Motion. For the reasons stated below and in the accompanying Findings of Fact, the Court will grant the Motion.

I. BACKGROUND

Meridian and Plastech are both automotive suppliers to the Ford Motor Company ("Ford"). Meridian was the tier 1 supplier to Ford of the bumper system for the Ford Expedition. (FOF 3) An essential component of the Expedition's bumper system is the U222 Fascia. (FOF 4) Meridian did not have the tooling necessary to produce U222 Fascias for the 2002-2006 Expedition model years. (FOF 5) Therefore, Meridian was required to utilize a tier 2 supplier to manufacture the U222 Fascias; Plastech ultimately became that supplier. (FOF 6, 7) Because Plastech was the supplier for the U222 Fascias, Meridian depended upon Plastech's timely delivery of the U222 Fascias in order to meet its obligations to Ford for the Expedition bumper system. (FOF 14)

On April 26, 2005 (the "Petition Date"), Meridian and certain of its subsidiaries (collectively the "Debtors") filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. On that same day, Meridian filed the Motion of the Debtors for an Order Authorizing the Payment of Prepetition Claims of Critical Vendors and Service Providers (the "Critical Vendor Motion") which was granted on an interim basis on April 27, 2005, and by final order dated May 26, 2005 (collectively, the "Critical Vendor Orders"). (FOF 23, 24, 26) The Critical Vendor Orders required that Meridian "undertake all appropriate efforts to cause each Critical Vendor to enter into" a Trade Agreement that included, inter alia, that the Critical Trade Vendor would be bound by the parties' Customary Trade Terms (including pricing). (FOF 27) The Critical Vendor Orders further provided that if a Critical Vendor subsequently refused to supply goods to Meridian on Customary Trade Terms, the Critical Vendor would be required to repay any payment received in excess of the postpetition obligations owed to the Critical Vendor at that time. (FOF 27, 28)

On June 14, 2005, Meridian and Plastech entered into a Trade Agreement. (FOF 30) Meridian paid Plastech a total of $1.25 million of its pre-petition claim (the "Trade Payment"). (FOF 35) Pursuant to the Trade Agreement, Plastech agreed to supply Meridian with U222 Fascias. (FOF 37, 38)

A year later, in June 2006, Meridian was scheduled to cease production of the current model of the Expedition bumper system. (FOF 15) Meridian was, however, required thereafter to provide Ford with primed, unpainted service parts for those bumpers. (FOF 15) Under the Purchase Terms extant between the parties, Plastech was obligated to provide the U222 Fascias (including service and replacement parts) for ten years after production of the current model ceased, at the prices specified in the applicable Purchase Orders or Releases plus any actual cost differential for packaging (the "Production Price"). (FOF 16)

In January of 2006, Plastech advised Meridian that it would not supply U222 Fascia service parts once the model year production concluded in June 2006. (FOF 43) Meridian responded that Plastech was required by the parties' agreement to produce the service parts. (FOF 44) The issue was not resolved until the parties had a meeting with Ford in May at which time Plastech confirmed that it would provide service parts. (FOF 45)

In early July 2006, Plastech twice demanded price increases for the service parts: a 200% price increase and a 50% price increase. (FOF 48) Plastech stated that it would not ship the U222 Fascia service parts until it received a price increase. (FOF 49) When Meridian rejected Plastech's demands for price increases, Plastech failed to ship any U222 Fascias to Meridian during the months of July and August 2006. (FOF 50,51)

As a result of Plastech's failure to ship, Meridian asked Plastech to return the tooling necessary to produce the U222 Fascias, after Plastech had first built a bank of excess parts so that delivery to Ford would not be disrupted during the tool transfer process. (FOF 52) In response, Plastech wrote that it would continue to ship service parts at production prices for ninety days, but only if Meridian agreed to waive any preference claims it had against Plastech. (FOF 53) Meridian refused and on September 5, 2006, wrote a letter to Plastech asserting that "Plastech's refusal to supply service parts to Meridian in accordance with the terms of the Purchase Order constitutes a willful breach of Plastech's obligations to Meridian under the Critical Vendor Agreement" and "[a]s a result of such breach, pursuant to paragraph 5 of the Critical Vendor Agreement, Plastech is obligated to immediately return the [Trade] Payment to Meridian." (FOF 54, 55)

Plastech responded on September 7, 2006, by acknowledging its contractual obligation to supply service parts to Meridian at production prices and stating that Plastech remained committed to honoring its obligations. (FOF 57) Thereafter, Plastech resumed supplying parts to Meridian. Although Plastech continued to acknowledge its responsibility to deliver parts to Meridian, it did not fully perform its obligations and was constantly behind in deliveries to Meridian between September and December of 2006. (FOF 62-83) As a result of Plastech's failure to perform, Meridian was unable to supply an adequate number of bum per assemblies to Ford. (FOF 80, 83-85) Meridian continually complained to Plastech about its poor performance, asked it to comply with its obligations, and advised Plastech that it would pursue its legal rights if Plastech did not perform. (FOF 71, 72, 75, 79)

In December 2006, following months of discussions among Meridian, Ford and Plastech regarding Plastech's repeated failure to deliver parts, Plastech agreed to transfer all the tooling necessary to manufacture the U222 Fascias to Meridian. (FOF 86-88) On December 13, 2006, Plastech confirmed this agreement in writing. (FOF 88) The transfer of the tooling was completed and the Trade Agreement was mutually terminated by the parties on December 22, 2006. (FOF 90, 91)

In the interim, on December 6, 2006, the Court confirmed the Fourth Amended Joint Plan of Reorganization of the Debtors (the "Plan"), which became effective on December 29, 2006. (FOF 93, 94) In the Plan, Meridian assumed all its executory contracts or unexpired leases as of the Effective Date unless they were previously assumed, rejected, terminated, or expired. (FOF 98) In the Plan, Meridian also reserved causes of action it had against vendors, including specifically Plastech. (FOF 95-97)

On January 19, 2007, Meridian wrote to Plastech demanding that it immediately repay the Trade Payment because of its failure to abide by the terms of the Trade Agreement. (FOF 100) When Plastech refused to return the Trade Payment, Meridian filed the Compliance Motion on January 23, 2007. (FOF 101) An evidentiary hearing was held on the Motion on April 11, 2007. (FOF 103) Post trial briefs and Proposed Findings of Fact and Conclusions of Law were filed by the parties on May 10, 2007. (FOF 104) The matter is ripe for decision.

II. JURISDICTION

The Court has subject matter jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157 & 1334. Jurisdiction was reserved under the Trade Agreement and the Plan. (FOF 34, 99) Venue is proper in this district pursuant to 28 U.S.C. §§ 1408 & 1409. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), (C), (E), (L), & (0).

III. DISCUSSION

Meridian argues that Plastech is in breach of the Trade Agreement and, consequently, is obligated to return the Trade Payment under the terms of the Critical Vendor Orders. Plastech counters that (1) it did not breach the terms of the Trade Agreement, (2) Meridian failed to provide the requisite notice of default to terminate the Trade Agreement and has waived any default by Plastech, and (3) recoupment of the Trade Payment is precluded by confirmation of the Plan.

A. Breach of Contract

Meridian asserts that Plastech breached the Trade Agreement and accordingly must repay the Trade Payment. Meridian argues that Plastech, upon acceptance of the Trade Payment, became obligated to continue to supply product to Meridian during the bankruptcy case on the parties' Customary Trade Terms. Specifically, Meridian contends that those terms required Plastech to supply service parts at production prices on a timely basis. Because Plastech refused to do so, Meridian asserts that it must repay the Trade Payment. Meridian relies on the Critical Vendor Orders which provided:

If a Critical Vendor who has received payment of a prepetition claim subsequently refuses to supply goods to [Meridian] on Customary Trade Terms, any payments received by the Critical Vendor on account of its Critical...