In re Teligent, Inc.
| Decision Date | 29 October 2001 |
| Docket Number | No. 01-12974 (SMB).,01-12974 (SMB). |
| Citation | 268 BR 723 |
| Parties | In re TELIGENT, INC., et al., Debtors. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
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Kirkland & Ellis, New York City, James H.M. Sprayregen, Lena Mandel, Matthew N. Kleiman, Anup Sathy, Samuel A. Schwartz, of counsel, for Debtors.
Stern Greenberg & Kilcullen, Roseland, NJ, Herbert J. Stern, Joel M. Silverstein, of counsel, for Movants Graham G. Sampson, Linda Sampson, Sampson Family 2000 Trust, Michael P. Nazaruk, Karin Nazaruk and Nazaruk Family 2000 Trust.
Wasserman, Jurista & Stolz, P.C., Milburn, NJ, Daniel M. Stolz, Harry M. Gutfleish, of counsel, for Movants.
Section 365(c)(2) of the Bankruptcy Code prohibits a trustee from assuming an executory contract "to issue a security of the debtor." Graham G. Sampson ("Graham"), his wife Linda Sampson ("Linda"), the Sampson Family 2000 Trust (the "Sampson Trust"), Michael P. Nazaruk ("Michael"), his wife Karin Nazaruk ("Karin") and the Nazaruk Family 2000 Trust (the "Nazaruk Trust")(collectively, the "Movants"), contend that § 365(c)(2) prevents the debtor, Teligent, Inc. ("Teligent"), from assuming the parties' merger agreement, described below. In the alternative, they contend that Teligent should be compelled to assume or reject the agreement immediately.
For the reasons discussed below, I conclude that the merger agreement is an executory contract, and § 365(c)(2) does not prevent its assumption. Furthermore, in light of the debtors' current efforts to sell ECI, I will adjourn consideration of the Movants' alternative request for approximately thirty days.
The background to the present dispute is discussed at length in Sampson v. Teligent, Inc. (In re Teligent), A.P. No. 01/8091, 2001 WL 1134729 (Bankr.S.D.N.Y. Sept. 26, 2001)("Repudiation Decision"), familiarity with which is assumed.1 The following discussion highlights the facts relevant to the issues raised by the Movants' application.
Prior to the end of September 2000, Executive Conference, Inc. ("ECI") was an independent corporation providing teleconferencing services to its business customers. Graham and Michael each owned 48.75% of ECI, and the two Trusts each owned 1.25%. Graham, Michael and the Trusts are sometimes referred to collectively as the "Shareholders."
On or about September 29, 2000, Teligent, ECI, and the Shareholders entered into an Agreement and Plan of Merger and Reorganization, dated as of August 16, 2000 (the "Merger Agreement")(PX 35). Through the Merger Agreement, ECI would be merged into a newly-created first-tier subsidiary of Teligent, referred to in the Agreement as "Acquisition." (Merger Agreement, p. 1, 2nd WHEREAS clause.) The parties intended the transaction to qualify as a non-taxable reorganization under § 368(a) by virtue of § 368(a)(2)(D) of the Internal Revenue Code.2 (Id., p. 1, 3rd WHEREAS clause.) To ensure compliance with the Internal Revenue Code, the Merger Agreement required Teligent to pay in excess of 50% of the total merger consideration in Teligent common stock instead of cash. (Declaration of Graham Sampson, dated July 17, 2001, at ¶¶ 3-4.)
The Merger Agreement set out three forms of merger consideration. The Initial Merger Consideration, disbursed at the closing, totaled $50.84 million. Teligent paid $25.42 million, or 50%, in Teligent common stock, and satisfied the balance with cash. (Merger Agreement ¶ 2.02(e)(i).) In addition, Teligent had to pay Deferred Merger Consideration in the principal aggregate amount of $19.3 million over the next three years, plus interest at 6% per annum on the unpaid portion. At least 60% was payable in Teligent common stock. (Id., ¶ 2.02(e)(ii).) Finally, Graham was entitled to receive EBITDA Merger Consideration on or before November 30, 2003. The EBITDA Merger Consideration would be based on future earnings, and at least 50% had to be paid in Teligent common stock. (Id., ¶ 2.02(e)(iii).)3
The Merger Agreement required Graham and Michael, as well as their nonshareholder spouses Linda and Karin, to execute non-competition and non-disclosure agreements (the "Non-Compete/Non-Disclosure Agreement").4 As the name suggests, the Non-Compete/Non-Disclosure Agreements incorporated two restrictive covenants. First, the Restricted Parties could not participate in a competing business in any of the contiguous 48 states for a period of five years.5 Second, they could not disclose confidential information obtained from ECI. The execution of the Non-Compete/Non-Disclosure Agreements was a condition to closing, (Merger Agreement ¶ 6.01(f); Non-Compete/Non-Disclosure Agreement, 3rd WHEREAS clause), and a material inducement to Teligent's consent to the Merger Agreement. (Non-Compete/Non-Disclosure Agreement, 2nd WHEREAS clause.)
Delaware law governed the interpretation of the Merger Agreement, (Merger Agreement ¶ 10.06), as well as the Non-Compete/Non-Disclosure Agreements. (Non-Compete/Non-Disclosure Agreement ¶ III.) Finally, the Merger Agreement, together with the Exhibits and Schedules, represented the "final and complete contract of the parties." (Merger Agreement ¶ 10.03.)
After Teligent and its affiliates filed these chapter 11 cases on May 21, 2001, the Movants commenced an adversary proceeding to obtain a declaration, inter alia, that Teligent had repudiated the Merger Agreement prior to the petition date.6 This led to an expedited trial conducted on August 8, 2001. At its conclusion, I ruled that the Movants had failed to prove a repudiation, and dismissed the complaint. Repudiation Decision, 2001 WL 1134729, at *7.
Separately, the Movants initiated this contested matter to address the issues raised by § 365. In the first instance, they maintained that the Merger Agreement and the Non-Compete/Non-Disclosure Agreements form a single agreement that Teligent cannot assume because it is a "contract . . . to issue a security of the debtor" within the meaning of 11 U.S.C. § 365(c)(2). Moreover, since Teligent cannot assume the Merger Agreement, it cannot assign it. See 11 U.S.C. § 365(f)(2)(A). Alternatively, the Movants argued that the debtor should be compelled to assume the Merger Agreement immediately.
Teligent responded with a variety of alternative arguments: the Merger Agreement and the Non-Compete/Non-Disclosure Agreements are separate agreements, whether one or separate, they are not executory, but even if they are executory, § 365(c)(2) does not bar their assumption. Lastly, Teligent should not be forced to make the assumption/rejection decision at this time.
Section 365 deals with the assumption and assignment of executory contracts and unexpired leases. The trustee must assume or reject the entire contract, but the parties disagree over whether the Merger Agreement and the Non-Compete/Non-Disclosure Agreements comprise one contract or separate contracts. Under general contract law, the parties' intentions determine whether two separately executed agreements are in reality one. See Huyler's v. Ritz-Carlton Restaurant & Hotel Co., 1 F.2d 491, 493 (D.Del.1924)(applying Delaware law); Rudman v. Cowles Communications, Inc., 30 N.Y.2d 1, 330 N.Y.S.2d 33, 280 N.E.2d 867, 873 (1972)(applying New York law). The same rule applies to assumption and rejection issues under § 365. See Stewart Title Guaranty Co. v. Old Republic Nat'l Title Ins. Co., 83 F.3d 735, 739-41 (5th Cir.1996)(if parties intend a severable contract, the debtor may reject one agreement and not the other)(applying Texas law).
This issue was tried as part of the repudiation dispute. Although I did not have to decide it then, the trial record supports the finding that the parties intended the Merger Agreement and the Non-Compete/Non-Disclosure Agreements to be a single contract. First, the Merger Agreement says so. (See Merger Agreement ¶ 10.03)(defining the Merger Agreement and its Exhibits, e.g., the Non-Compete/Non-Disclosure Agreement, and the Schedules as the "final and complete contract of the parties"). Second, both sets of documents were executed on the same day and as part of the same transaction. (Tr. 80-81.) Third, neither side would have signed one unless the other side signed the second. The Non-Compete/Non-Disclosure Agreements state that their execution by the Restricted Parties is a condition to the closing and a material inducement to Teligent's willingness to enter into the transaction. In the same vein, Graham testified that he would not have signed the Non-Compete/Non-Disclosure Agreement without Teligent's agreement to buy ECI. "It was all one agreement." (Id. at 81.)
That some of the parties signed one of the agreements but not the other is consistent with this intention. Neither Karin nor Linda owned shares in ECI, and therefore, neither signed the Merger Agreement. In fact, they did not work for ECI and had no reason to sign a Non-Compete/Non-Disclosure Agreement, except that Teligent insisted on it, (see Merger Agreement ¶ 6.01(f)), doubtless to prevent Graham or Michael from running a competing business using their wives as figureheads. The Trusts, on the other hand, were shareholders in ECI, and hence, signed the Merger Agreement. There would be no reason for the Trusts to sign the Non-Compete/Non-Disclosure Agreements. Finally, only Graham and Michael signed both, but they were the only two that had interests affected by both. In short, each party signed the part of the overall agreement that touched on that party's rights.
Next, Teligent insists that even if the Merger Agreement includes the Non-Compete/Non-Disclosure Agreements, and there is but one contract, the contract is not executory. In support, Teligent asserts that...
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