PEARL-PHIL GMT LTD. v. Caldor Corp.
| Citation | 266 BR 575 |
| Decision Date | 30 March 2001 |
| Docket Number | No. 99 Civ. 11798(RCC).,99 Civ. 11798(RCC). |
| Parties | PEARL-PHIL GMT (FAR EAST) LTD., Appellant, v. The CALDOR CORPORATION, et al., Appellees. |
| Court | U.S. District Court — Southern District of New York |
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Pearl-Phil GMT (Far East) Ltd. ("Pearl" or "Appellant") appeals, pursuant to 28 U.S.C. § 158(a)(1), from the Memorandum Decision and Order entered November 1, 1999, by the United States Bankruptcy Court for the Southern District of New York ruling in favor of debtor The Caldor Corporation and its affiliates (collectively, "Caldor" or "Appellee"). Pearl argues that the Bankruptcy Court, Garrity, J., erred in holding that Pearl's claim for damages from Caldor's breach of certain purchase orders "arose" at the time the contracts were entered into, thus meriting only pro rata payment. Pearl further argues that it did not receive adequate notice of the Bankruptcy Court's order authorizing the wind-down of Caldor's business operations, and thus the Bankruptcy Court improperly applied the order to Pearl's claim.
Prior to the events at issue in this appeal, Caldor was one of the largest discount retailers in the Northeast and Mid-Atlantic states, with 145 stores and approximately $2.5 million in annual sales. On September 18, 1995, Caldor filed a voluntary petition for reorganization under chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq. Caldor continued to operate its business as debtors in possession pursuant to §§ 1107 and 1108 of the Bankruptcy Code. By late 1998, however, it had become apparent that Caldor's performance would not enable the company to meet its business plan for that fiscal year. Soon thereafter, Caldor suspended payments to certain trade vendors and declined to receive merchandise for which Caldor had not yet paid. Pearl, an Asianbased vendor who had entered into three purchase orders with Caldor during 1998, was one of the few exceptions to this cancellation.1
On January 22, 1999, the Bankruptcy Court conducted an evidentiary hearing on Caldor's emergency application to wind-down its businesses in chapter 11. Caldor had provided notice of its application one day earlier to certain parties.2 Following the hearing, the Bankruptcy Court issued an order (the "Wind-Down Order") which, inter alia, (1) authorized Caldor to wind-down its business operations, (2) restrained Caldor from paying post-petition claims arising before January 23, 1999 (the "Operating Period Claims") and established a bar date for the filing of such claims; and (3) conferred super-priority administrative status upon post-petition claims arising after January 22, 1999 (the "Wind-Down Period Claims"). In other words, while full payment was permitted on the Wind-Down Period Claims, the Operating Period Claims were entitled only to a pro rata distribution from the remaining funds.
The Wind-Down Order also provided that a subsequent hearing would be held on February 5, 1999, and directed interested parties to file any objections to the Wind-Down Order three days prior to that date. In order to obtain assistance in serving notice of the Wind-Down Order and Operating Claims bar date on approximately 35,000 entities (including more than 1,000 foreign entities), Caldor contacted its exclusive overseas agents Swire and Maclaine Ltd. and Beldare Enterprises, Ltd. (collectively, "Swire"). Caldor requested from Swire a list of the names and addresses of those foreign vendors with whom Swire was doing business on behalf of Caldor. After receiving the list on February 1, 1999, Caldor's claims agent mailed notice to the named vendors, including Pearl, on that same day. Caldor also published notice of the Operating Claims bar date in The New York Times and Women's Wear Daily.
According to Pearl's manager, Pearl did not receive the notice materials until March 1, 1999. In the meantime, the Bankruptcy Court held hearings on February 5 and 8, 1999, and reaffirmed the Wind-Down Order. The Bankruptcy Court concluded that the bifurcation of post-petition claims was necessary because it was unreasonable to expect suppliers of goods and services to do business with Caldor during the Wind-Down Period without granting them super-priority status. On February 17, 1999, Caldor instructed Swire to cancel all outstanding purchase orders, which included those with Pearl. Thereafter, on March 31, 1999, Pearl, as part of a committee of Vendors, filed a motion seeking payment of its claim as an administrative expense.3 Pearl argued that it was entitled to payment in full because its claim arose at the time when Caldor breached the purchase orders in February, and thus must be considered a Wind-Down Period Claim. Moreover, in its reply papers filed on July 30, 1999, Pearl argued that even if its claim arose prior to the Wind-Down Period, the Wind-Down Order could not apply because Pearl did not receive adequate notice thereof.
The Bankruptcy Court conducted an evidentiary hearing on Pearl's motion on August 11 and 12, 1999. Two months later, the Bankruptcy Court issued a Memorandum Decision holding that Pearl's claim arose at the time when the purchase orders were entered into in 1998 and that Pearl was not deprived of due process. In re Caldor, Inc.-NY, 240 B.R. 180 (Bankr. S.D.N.Y.1999). Consequently, the Bankruptcy Court denied Pearl's application for payment in full and directed that Pearl's claim be paid on a pro rata basis with other Operating Period claims. Id. at 195. Pearl now appeals.
This Court reviews the legal conclusions of the Bankruptcy Court de novo. National Union Fire Ins. Co. v. Bonnanzio (In re Bonnanzio), 91 F.3d 296, 300 (2d Cir.1996). Findings of fact are reviewed under a clearly erroneous standard. Id.; Fed. R. Bankr.P. 8013. Deference is given to the Bankruptcy Court's factual determinations because of its "expertise and superior position to make determinations of credibility." In re Commodore Bus. Mach., 246 B.R. 476, 487 (S.D.N.Y.2000). The Bankruptcy Court's choice between two permissible views of the facts cannot be held to be clearly erroneous. Id. (citing Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985)).
Pearl argues that the Bankruptcy Court erred in holding that Pearl's claim "arose" when the purchase orders were entered into rather than at the time of the breach, thus meriting only pro rata payment as an Operating Period Claim. Pearl contends, inter alia, that the Bankruptcy Court's decision disregarded controlling precedent and improperly applied federal common law rather than state law. For the reasons set forth below, this Court concludes that the Bankruptcy Court correctly applied the relevant law and affirms.
The Bankruptcy Court held, and Pearl does not dispute, that Pearl's administrative expense must fall within the definition of a "claim" before it can be deemed to arise. Section 101(5) of the Code defines a "claim" as a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured." 11 U.S.C. § 101(5). Congress intended the term "claim" to have "the broadest possible definition . . . including all legal obligations of the debtor, no matter how remote or contingent." H.R.Rep. No. 95-595, at 649 (1977), reprinted in 1978 U.S.C.C.A.N. 5963. It has been recognized that this broad definition "performs a vital role in the reorganization process by requiring, in conjunction with the bar date, that all those with a potential call on the debtor's assets, provided the call in at least some circumstances could give rise to a suit for payment, come before the reorganization court so that those demands can be allowed or disallowed and their priority and dischargeability determined." In re Kings Terrace Nursing Home & Health Related Facility, 184 B.R. 200, 204 (S.D.N.Y.1995) ). In this way, the debtor is provided with the opportunity for a fresh start.
The Bankruptcy Court determined that a contingent claim arose when the purchase orders were executed. In re Caldor, 240 B.R. at 191-92. Although the Bankruptcy Code itself does not define the term contingent, the Second Circuit has held that a claim is contingent "if the debtor's legal duty to pay does not come into existence until triggered by the occurrence of a future event." Mazzeo v. United States (In re Mazzeo), 131 F.3d 295, 303 (2d Cir.1997). Moreover, the future event must have been "within the actual or presumed contemplation of the parties at the time the original relationship between the parties was created." In re Chateaugay Corp., 944 F.2d at 1004 (citations omitted).
Certainly the possibility of a future breach is within the presumed contemplation of the contracting parties. See In re Russell, 193 B.R. 568, 571 (Bankr.S.D.Cal. 1996) ( ); see also In re Emelity, 251 B.R. 151, 156-57 (Bankr. S.D.Cal.2000). If this were not so, all contract provisions governing remedies in the event of a breach would be superfluous. Indeed, Pearl must acknowledge that a breach of the purchase orders was actually contemplated in its case, because any risk of nonpayment was planned to be covered by letters of credit. Pearl Br. at 28 n. 36.
Pearl attempts to avoid the conclusion that it had a contingent claim by referring back to the language of § 101(5) and focusing on the term "right to payment." In order to define that term, Pearl cites Pennsylvania Dep't of Welfare v. Davenport, 495 U.S. 552, 110...
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