In re Patriot Aviation Services, Inc.

• Decision Date: 18 November 2008
• Docket Number: No. 07-14995-BKC-JKO.,07-14995-BKC-JKO.
• Citation: 396 B.R. 780
• Parties: In re PATRIOT AVIATION SERVICES, INC., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Florida

396 B.R. 780

In re PATRIOT AVIATION SERVICES, INC., Debtor.

No. 07-14995-BKC-JKO.

United States Bankruptcy Court, S.D. Florida, Fort Lauderdale Division.

November 18, 2008.

Grace E. Robson, Fort Lauderdale, FL, Jordi Guso, Miami, FL, for Debtor.

ORDER DENYING COMMITTEE'S MOTION FOR PARTIAL SUMMARY JUDGMENT ON OBJECTION TO CLAIM NO. 57 FILED BY MEZZCAP PARTNERS, LLC [DE 332]

THIS CASE presents an interesting issue as to whether a claim for liquidated damages asserted as a general unsecured claim and arising out of an aborted sale of secured debt securities can be subordinated to the claims of general unsecured creditors under Section 510(b) of the Bankruptcy Code, 11 U.S.C. § 510(b). Because the securities contemplated under the aborted transaction were to have been secured by the Debtor's assets, I conclude that the claim for liquidated damages arising out of the failure of that transaction should be subordinated under § 510(b) only to secured claims against the Debtor, and are thus properly treated as pari passu with general unsecured claims. Since the Official Committee of Unsecured Creditors (the "Committee") Motion for Partial Summary Judgment on Objection to Claim No. 57 (the "Motion") [DE 332] which is before me sought to subordinate the claim of the aborted securities purchaser, MezzCap Partners, LLC ("MezzCap"), to the claims of general unsecured creditors, I will deny the motion and hold that MezzCap's claim, if ultimately allowed, should not be subordinated below a general unsecured claim.

JURISDICTION AND VENUE

This is an Objection to Claim No. 57 filed by MezzCap, a creditor in this bankruptcy case. I have jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(a) and 157(a). This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(1) and § 157(b)(2)(B). Venue in this District is proper pursuant to 28 U.S.C. § 1409.

FACTS

1. Procedural history.

An involuntary Chapter 11 petition [DE 1] was filed against Patriot Aviation Services, Inc. (the "Debtor") on June 27, 2007 and an order for relief was executed on August 2, 2007 [DE 46]. On August 30, 2007, MezzCap filed general unsecured proof of claim No. 57 in the amount of $120,000 (the "Claim"). The Chapter 11 Trustee, Kenneth A. Welt, filed an objection [DE 225] to the Claim, to which MezzCap responded [DE 263]. The Committee thereafter filed a joinder to the Trustee's objection to the Claim [DE 331] and the Motion now before me. MezzCap filed a response in opposition to the Motion (the "Response") [DE 369], and the Committee filed its reply (the "Reply") [DE 381]. The parties submitted a joint stipulation of facts ("Stipulation of Facts") [DE 380] and I conducted oral argument on the Motion.

2. Findings of fact.

On January 9, 2007, the Debtor and MezzCap duly executed a letter of intent agreement (the "LOI") relating to the proposed purchase by MezzCap from Patriot of certain senior subordinated notes in the aggregate principal amount of $4 million (the "Notes"). Stipulation of Facts at ¶ 1. A copy of the LOI, including annexes thereto, is attached as Exhibit "A" to the Response. See Stipulation of Facts at ¶ 2. Attached to the LOI is the proposed Securities Purchase Agreement (the "Purchase Agreement"). See Exhibit "A" attached to the Response at Annex B. The LOI provides in relevant part that "upon receipt of the written acceptance of this letter agreement by the [Debtor], the provisions of paragraphs 12 through 13 shall constitute legally valid and binding agreements of the parties hereto." Exhibit "A" attached to the Response at ¶ 8. Provision 3 of the LOI provided the conditions to closing, which states in relevant part: "... [MezzCap's] consummation of the transaction contemplated by this letter of intent is subject to ... the negotiation, execution and delivery of definitive documentation, including a securities purchase agreement containing terms and conditions mutually acceptable to the [Debtor] and [MezzCap]." See Exhibit "A" attached to the Response. A definitive agreement, as contemplated in paragraph 3(i) of the LOI, was never executed by and between the Debtor and MezzCap, and any proposed transaction by and between Debtor and MezzCap was never consummated. Stipulation of Facts at ¶ 3.

The basis for MezzCap's claim against the Debtor is the $120,000 "Alternative Transaction Fee" provided for in paragraph 4(b) of the LOI. See Section 1 in the Claim. MezzCap asserts that it is owed $120,000 in liquidated damages based on the alleged multiple breaches by the Debtor of the LOI as defined in paragraph 4(a) and (b) of the Agreement. Stipulation of Facts at ¶ 4. Paragraph 4(a) of the LOI states:

In consideration of the capital and other resources (human or otherwise) committed and to be committed to its due diligence investigation of the [Debtor] and the consummation of the transactions contemplated by this letter of intent, during the Effective Period (as defined in paragraph 9), the [Debtor] will not, nor will it authorize any of its respective affiliates subsidiaries, shareholders, members, managers, directors, officers, employees, attorneys, accountants, investment bankers ..., business brokers, representatives or agents to, directly or indirectly, initiate or continue contact with, make, solicit, consider, accept, or encourage any inquiries or proposals from, furnish any information regarding the [Debtor] or its business or assets to, or engage or participate in any discussions or negotiations with, any person or entity with respect to any proposal pursuant to which the [Debtor] would (i) obtain any debt or equity capital (other than up to $1.5 million of funded senior indebtedness on terms and conditions and provided by a lender acceptable to [MezzCap]), (ii) be acquired, whether through a purchase, merger, consolidation or other business combination or (iii) sell, lease or otherwise dispose of all or a substantial part of the assets of any of the [Debtor] or its businesses. Any transaction referred to in clauses (i), (ii) or (iii) above is referred to as an "Alterative Transaction". The [Debtor] will promptly communicate to [MezzCap] in writing the fact that the [Debtor] has received any proposal or inquiry regarding any Alternative Transaction.

Exhibit "A" attached to the Response at ¶ 4(a). Paragraph 4(b) of the LOI states:

If (i) this letter agreement is terminated by the [Debtor] for any reason (other than as provided in this paragraph 4(b)) and within six (6) months after such termination, or (ii) prior to the termination of this letter agreement, the [Debtor] enters into an agreement or understanding with a third party relating to an Alternative Transaction with such party, then (in lieu of any damages due to [MezzCap] for any breach of this letter agreement by the [Debtor] but in addition to the reimbursement obligation provided in paragraph 7 below) the [Debtor] shall be liable, and shall pay, to [MezzCap] the amount of $120,000 (the "Alternative Transaction Fee"), which Alternative Transaction Fee shall be due and payable to [MezzCap] in cash immediately upon the entering into of such agreement or understanding; provided, however, that the [Debtor] will not be obligated to pay [MezzCap] the Alternative Transaction Fee if [MezzCap] terminates this letter agreement as a result of its decision not to proceed with this transaction based solely upon its due diligence investigation.

Exhibit "A" attached to the Response at ¶ 4(b).

The term of the LOI and the means by which it would terminate were as follows:

The term of this letter of intent shall commence on the date [MezzCap] shall have received the written acceptance of this letter of intent from the [Debtor] and shall terminate on the earlier to occur of (i) the Final Closing Date of the transaction contemplated hereby or (ii) the date this letter agreement is terminated pursuant to this paragraph 9 (the "Effective Period"). Either party may terminate this letter agreement without any liability of any kind to the other by giving written notice of termination to the other party at any time after April 30, 2007 (which termination shall be effective as of the date of receipt of such written notice). In addition, [MezzCap] shall have the sole right to terminate this letter agreement at any time upon written notice to the [Debtor] (x) if (a) it decides, in its sole discretion, not to proceed with the transactions contemplated herein based upon the results of its due diligence investigation of the [Debtor], or (b) any event or circumstance occurs which, individually or together with any other event or circumstance, has had or would have a material adverse change on any of the [Debtor] or (y) there occurs any other substantial domestic or international calamity or terrorist attack or crisis or change in economic conditions or in the financial markets of the United States which, in the good faith judgment of [MezzCap], is material and makes it impractical or inadvisable to proceed with the transaction contemplated herein. Upon termination of this letter agreement, neither the [Debtor] nor [MezzCap] shall have any liability or further obligation to the other by reason of this letter of intent except pursuant to the obligations under paragraphs 4(b), 6, 7 and 13, which will survive termination.

Exhibit "A" attached to the Response at ¶ 9.

MezzCap is an investment capital firm. Exhibit "B" attached to the Response at ¶ 4. The structure of the proposed deal provided for debt financing collateralized by the tangible assets in the Debtor. See Exhibit "A" attached to the Response at Annex A. Under the terms of the Notes the Debtor would, "grant to [MezzCap] a perfected first priority lien upon, and security interest in, its respective assets, including all subsidiary stock; provided, however, to the extent that any such assets are subject to a first priority security interest of a senior lender (the `Senior Lender'), the lien and security interest of [Mez...