In re Simon Transp. Services, Inc.

• Citation: 292 B.R. 207
• Decision Date: 25 April 2003
• Docket Number: No. 02-22906.,02-22906.
• Parties: In re SIMON TRANSPORTATION SERVICES, INC., Dick Simon Trucking, Inc., and Simon Terminal, LLC, Debtors.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Utah

292 B.R. 207

In re SIMON TRANSPORTATION SERVICES, INC., Dick Simon Trucking, Inc., and Simon Terminal, LLC, Debtors.

No. 02-22906.

United States Bankruptcy Court, D. Utah.

April 25, 2003.

COPYRIGHT MATERIAL OMITTED

L. Mark Ferre, Weston L. Harris, Parsons Davies Kinghorn & Peters, Salt Lake City, UT, Mark A. Thornhill, Scott J. Goldstein, Spencer, Fane, Britt & Browne, LLP, Kansas City, MO, for debtor.

Peter W. Billings, Jr., Fabian & Clendenin, Steve P. Young, Holme Roberts & Owen, Salt Lake City, UT, Mark S. Swan, Richer Swan & Overholt, South Jordan, UT, for Unsecured Creditors Committee.

ORDER DENYING MOTION TO RECONSIDER

GLEN E. CLARK, Chief Judge.

On October 21, 2002, the Court denied, without prejudice, a Supplemental Motion to Assume and Assign filed by Simon Transportation Services Inc., a Nevada corporation, Dick Simon Trucking, Inc., a Utah corporation, and Simon Terminal, LLC, an Arizona limited liability company (collectively referred to as "Simon"), and ruled that certain trade-back agreements were not marketed, sold or assigned as a part of a sale approved by an Order entered April 22, 2002 (the "Sale"), that the trade-back agreements were executory in nature, and that the Unsecured Creditors' Committee was to auction the trade-back agreements to the highest bidder. The Court's ruling of October 21, 2002, was reduced to writing and entered on December 3, 2002 (docket # 852), a timely motion to reconsider was granted, and the hearing to reconsider was conducted on January 17, 2003, February 10, 2003, and February 12, 2003.

At the hearing to reconsider, Central Refrigeration Services, Inc., ("Central") was represented by Michael N. Emery and Wayne Z. Bennett of Richards, Brandt, Miller & Nelson; Freightliner Corporation and Freightliner Market Development Corporation (collectively referred to as "Freightliner") was represented by J. Thomas Beckett and Dianna M. Gibson of Parsons, Behle & Latimer; Simon was represented by Weston L. Harris of Parsons Davies, Kinghorn & Peters; and the Unsecured Creditors' Committee was represented by Peter W. Billings, Jr., of Fabian & Clendenin. Extensive evidence was introduced and argument of counsel was presented. Based thereupon, and the pleadings filed, the Court now issues the following ruling.

Facts

Simon was one of the nation's largest temperature-controlled motor carriers with more than 2,300 tractors and 3,300 trailers, many of which were leased or financed. In September 2000, Simon was acquired by Jerry Moyes ("Moyes") through the acquisition of a controlling interest in Simon's common stock.

On the petition date, Simon owned approximately 461 trade-back agreements (the "Trade-Back Agreements") with Freightliner. Trade-Back Agreements were often negotiated by Simon as a part of the purchase agreement when Simon acquired new trucks from Freightliner. The Trade-Back Agreements gave Simon an option to trade in a used Freightliner truck at a favorable price when purchasing new equipment from Freightliner. Most of the Trade-Back Agreements have a non-transferability clause that restricts their assignment to a third party. The Trade-Back Agreements require Simon to maintain the used trucks to certain agreed specifications¹ and require Freightliner to repurchase used trucks at a price equal to 55 percent of their original purchase. Simon is under no contractual obligation to exercise the Trade-Back Agreements other than realizing the benefit of the bargain struck with Freightliner at the time the Trade-Back Agreements were negotiated. The price set for a used truck in the Trade-Back Agreements is significantly higher than the current market price for a used truck, making the Freightliner Trade-Back Agreements, in aggregate, worth up to $4.1 million.

On March 11, 2002, with little or no prospect for a successful reorganization, Simon filed a motion to approve the sale of substantially all of its assets and to approve assumption and assignment of leases and executory contracts ("Sale Motion"). The Sale Motion sought to utilize an initial offer proposed by Central as a "Stalking Horse" bid intended to be "shopped around" to attract higher offers. Central, a corporation controlled by Moyes, was organized for the purpose of acquiring the assets of Simon through this sale. The Sale Motion sought an expedited schedule for the marketing and sale because Simon reported operating losses of $100,000 per day and was on the verge of exhausting its operating capital.

The Sale Motion described an active marketing effort that would provide a competitive bidding and auction process with adequate notice to all creditors and parties in interest.

A "Term Sheet" describing the assets to be sold and the terms of the contemplated sale was attached to the Sale Motion. Paragraph 4 of the Term Sheet stated that Simon will sell or assign to the buyer all of "the debtors' rights" in the conditional commitment to repurchase agreements, letters and similar "buybacks" or "tradeback" agreements. The Term Sheet contains no information² concerning the number of Trade-Back Agreements involved, no description of the terms or conditions of the Trade-Back Agreements, no estimate of the value of Trade-Back Agreements, and no discussion to inform a prospective bidder of the possibility that under the bankruptcy laws the Trade-Back Agreements may be assigned to the successful bidder notwithstanding any non-transferability clause.

Morgan Keegan & Company, Inc., ("Morgan Keegan"), an investment banking firm specializing in mergers and acquisitions involving transportation and logistics companies, was selected by Simon to market its proposed sale. One of the principal tools utilized by Morgan Keegan in its efforts to promote the sale was a "Confidential Memorandum," a lengthy document intended to provide detailed financial information about Simon's business and assets for use by prospective bidders. The Confidential Memorandum describes the Trade-Back Agreements in the following way:

A substantial portion of the Company's tractor fleet is covered by trade-in and repurchase agreements with the manufacturer. The trade-in and repurchase agreements require the Company to purchase additional tractors in connection with the trade-ins or repurchases....

There is no disclosure of the Trade-Back Agreements' estimated value³, nor is there any mention of the possibility that, under the Bankruptcy Code, the Trade-Back Agreements may be assigned to a third party notwithstanding a non-transferability clause.

On March 21, 2002, ten days after filing the Sale Motion, Simon's bankruptcy Schedules and Statements were filed with the Court (docket # 188). Simon's ScheduleB — Personal Property consists of over 300 pages. There is nothing in the 300 pages of Simon's Schedule B that discloses or discusses the existence of the Trade-Back Agreements nor is there an estimate of the value of the Trade-Back Agreements.⁴

Simon's ScheduleG — Executory Contracts lists a total of eight executory contracts. None of the executory contracts disclosed on Schedule G are the Trade-Back Agreements.

On March 22, 2002, the Court granted an Order establishing auction procedures and notice requirements ("Auction Procedures Order") with respect to Simon's Sale Motion. The Auction Procedures Order, among other things, named Central as the "Stalking Horse" bidder, set March 25, 2002 as the date by which Central's Asset Purchase Agreement ("Asset Purchase Agreement") should be filed with the Court, required that Simon use its best efforts to accommodate all requests for reasonable due diligence prior to the sale hearing, set a bid deadline for prospective bidders of April 5, 2002, and required that Simon provide notice of the proposed bidding auction, and sale to all creditors, parties in interest, and to all parties to executory contracts and leases.

It is undisputed that notice of the proposed sale was not sent specifically to Freightliner Corporation or to Freightliner Market Development Corporation.

On March 25, 2002, Central filed its Asset Purchase Agreement with the Court, but it did not disclose the existence or the value of the Trade-Back Agreements. The schedules attached to the Asset Purchase Agreement were blank. The Asset Purchase Agreement at paragraph 9.18 indicates that the Asset Purchase Agreement was filed without schedules and that the schedules shall be filed with the Court no later than April 3, 2002. Paragraph 9.17 states that time is of the essence.

In an effort to promote the sale, Morgan Keegan established a document room to facilitate due diligence of prospective bidders in preparing competitive bids for Simon's assets. Frozen Foods Express Industries, Inc., ("Frozen Foods") was the only prospective bidder to send a team to visit the document room.

Robert Goates, Chief Financial Officer of Simon, issued a letter dated April 2, 2002⁵ to F. Dixon McElwee, Jr., Chief Financial Officer of Frozen Foods, in response to a due diligence inquiry made by Frozen Foods (Central exhibit "O"). The letter, at page one, in reference to Item 11 states that: "None of the trade-in or buyback agreements have been renegotiated. However, we are provid[ing] you a copy o[f] all existing agreements." The letter fails to mention the possibility that under the Bankruptcy Code, Simon may assume and assign the Trade-Back Agreements to a third party notwithstanding the Trade-Back Agreements' non-transferability clauses. The omission is significant⁶ because without that information, Frozen Foods would likely assume that the Trade-Back Agreements would not be readily assignable and therefore of little value.

It is generally understood within the trucking industry that a trade-back agreement cannot be assigned to a third party unless it has been renegotiated between the original buyer and the manufacturer.

On April 4, 2002, one day before the bid deadline,⁷ Central filed its supplement to the Asset Purchase Agreement (docket...