The Official Comm. of Unsecured Creditors on Behalf of the Bankr. Estate of the Great Atl. & Pac. Tea Co. v. McKesson Corp. (In re Great Atl. & Pac. Tea Co.)
| Docket Number | 15-23007 (LGB),Adv. Pro. 17-08264 (LGB) |
| Decision Date | 18 January 2024 |
| Parties | In re: THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., Debtors. v. MCKESSON CORPORATION, Defendant. THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS ON BEHALF OF THE BANKRUPTCY ESTATE OF THE GREAT ATLANTIC & PACIFIC TEA COMPANY INC., et al., Plaintiff, |
| Court | U.S. Bankruptcy Court — Southern District of New York |
BUCHALTER Attorneys for McKesson Corporation By: Jeffrey Garfinkle
KLESTADT WINTERS JURELLER SOUTHARD & STEVENS, LLP Attorneys for McKesson Corporation By: Tracy Klestadt
GRIFFIN HAMERSKY LLP Attorneys for the Official Committee of Unsecured Creditors and Special Counsel for the Debtor
By Michael Hamersky Richard Milin
On July 13, 2017, the Official Committee of Unsecured Creditors on behalf of the bankruptcy estate of The Great Atlantic &Pacific Tea Company[1] (the "Committee" or "Plaintiff") initiated an adversary proceeding (the "Adversary Proceeding") when it filed its Complaint for Avoidance and Recovery of Preferential Transfers Pursuant to 11 U.S.C. §§ 547 &550 (the "Complaint") against a creditor of the Debtor, McKesson Corporation d/b/a McKesson Drug Co. (the "Defendant" or "McKesson"). ECF No. 1 ("Compl.").[2]
Before the Court is McKesson's Motion for Summary Judgment asking the Court to determine the extent of its subsequent new value preference defense, the nature of the claim that it would have if any of the transfers at issue were determined to be preferences, and whether its non-contingent administrative claim may be set off against any preferences. For the reasons set forth in this decision, McKesson's Motion for Summary Judgment is granted in part and denied in part.
The Complaint seeks the avoidance and recovery of thirty payments made by the Debtor to McKesson, totaling $67,752,943.44, during the ninety-day period prior to the Petition Date (the "Preference Period"). Compl. ¶ 14. The first claim for relief is brought pursuant to section 547 of Title 11 of the United States Bankruptcy Code (the "Bankruptcy Code"), and the second is brought pursuant to section 550(a) of the Bankruptcy Code. Compl. ¶¶ 14-22, 24-26.
On August 10, 2017, McKesson filed its Answer to the Complaint (the "Answer"). ECF No. 4. McKesson asserted various defenses set forth in section 547(c) of the Bankruptcy Code, including the ordinary course of business, contemporaneous exchange, and subsequent new value defenses, as well as a setoff defense on account of McKesson's administrative claim pursuant to section 503(b)(9) of the Bankruptcy Code. Answer ¶¶ 16, 18, 21, 24.
Following the filing of the Answer, the Committee and McKesson conducted an initial round of discovery and participated in a mediation that was ultimately unsuccessful. See ECF No. 23. On May 1, 2019, as permitted by this Court at a hearing held on November 16, 2018, McKesson filed a Motion for Summary Judgment (the "2019 Motion") seeking a determination that the alleged preferential transfers were shielded via the defenses McKesson asserted in its Answer, specifically, the ordinary course of business, contemporaneous exchange, subsequent new value, and section 503(b)(9) setoff defenses. ECF No. 24, at 4. The Declaration of Jenifer Towsley was filed in support of the 2019 Motion. ECF No. 25 ("2019 Towsley Decl.").
The Committee filed an opposition to the 2019 Motion and the Declaration of Tim Carnahan in support of their opposition. ECF No. 34; ECF No. 35 (the "Carnahan Decl.").
At a hearing held on September 16, 2019 (the "September 2019 Hearing") Judge Drain granted in part and denied in part the 2019 Motion, adopting the reasoning set forth in Official Comm. of Unsecured Creditors of Quantum Foods, LLC v. Tyson Foods, Inc. (In re Quantum Foods, LLC), 554 B.R. 729, 733 (Bankr. D. Del. 2016), ruling that McKesson has the right to set off its section 503(b)(9) administrative claim against any judgment for avoidance and recovery of preferential transfers. ECF No. 43, Hr'g Tr. at 54, 57-58.
Following the September 2019 Hearing, the parties conducted another round of discovery, during which the Committee filed an Amended Complaint adding two new additional causes of action, one for an alleged violation of the automatic stay and a second for defensive claims (the "Amended Complaint"). ECF No. 93 ("Am. Compl."), ¶¶ 131-69, 170-200. In response, McKesson filed a Motion to Dismiss the Amended Complaint (the "Motion to Dismiss"). ECF No. 99. On December 27, 2021 the Motion to Dismiss was denied by the Court, except that the claim asserting various defensive claims for alleged violations of sections 362(a) and 542 "shall only seek relief as a defense, setoff or recoupment, against [McKesson's] allowed claims, including any allowed administrative priority claims under section 503(b)(9)." ECF No. 107, ¶ 2.
On April 15, 2022, McKesson filed two summary judgment motions. One motion, McKesson Corporation's Motion for Summary Judgment on Debtor's First, Fifth, and Thirteenth Omnibus Claim Objections Seeking to Disallow 11 U.S.C. § 503(b)(9) Claims[3] (the "Claim Motion"), was filed in the main bankruptcy case. Main Case [ECF No. 5059]. The second motion, McKesson Corporation's Motion for Summary Judgment or, in the Alternative, Summary Adjudication and Supporting Memorandum of Facts and Law (the "Setoff Motion"), was filed in the Adversary Proceeding. ECF No. 115 ("Setoff Mot."). In support of both the Claim Motion and the Setoff Motion, McKesson filed McKesson Corporation's Local Rule 7056-1(b) Statement of Undisputed Facts and Conclusions of Law in Support of Motions For Summary Judgment ("McKesson's Statement of Undisputed Facts"). Main Case [ECF No. 5064]; Adv. Pro. [ECF No. 120] ("McKesson's Statement"). In further support of the Claim Motion and Setoff Motion, McKesson filed the Declaration of Jenifer Towsley. ECF No. 118 ("2022 Towsley Decl.").
On May 6, 2022, the Committee filed its opposition to the Setoff Motion (the "Setoff Opposition") and its opposition to the Claim Motion (the "Claim Opposition"). ECF No. 125 ("Setoff Opp'n."); ECF No. 126 ("Claim Opp'n."). The Committee also filed a response to McKesson's Statement of Undisputed Facts. Main Case [ECF No. 5088]; Adv. Pro. [ECF No. 129] ("Committee's Statement").
On May 13, 2022, McKesson filed a reply to the Claim Opposition and a reply to the Setoff Opposition (the "Setoff Reply"). Main Case [ECF No. 5095]; Adv. Pro. [ECF No. 134] ("Reply"). In support of the Setoff Reply, McKesson filed the Declarations of Dawn DeVito and Richard Milin. ECF No. 127 ("DeVito Decl."); ECF No. 128.
On July 19, 2022, McKesson filed a Notice of Relevant Decision by Eleventh Circuit Court of Appeals, bringing to the Court's attention a recent Eleventh Circuit decision that addresses issues similar to those in the Adversary Proceeding. ECF No. 139.
The business relationship between McKesson and the Debtor was generally governed by a Supply Agreement dated December 6, 2012 (the "Supply Agreement") and New York state law. Am. Compl. ¶¶ 19-20; Setoff Mot. at 7-8; ECF No. 25-1 ("Supply Agreement"). Under the Supply Agreement, McKesson supplied the Debtor's pharmacies with "Merchandise," defined in the Supply Agreement to include "prescription drugs ('Rx'), over the counter drugs ('OTC'), health and beauty aids, and sundries" (collectively, the "Merchandise"). 2022 Towsley Decl. ¶ 4.
The Debtor placed orders with McKesson through an electronic daily ordering system, and McKesson delivered Merchandise to the Debtor's pharmacies five days per week, Monday through Friday. 2022 Towsley Decl. ¶ 4. Pursuant to the terms of the Supply Agreement, McKesson sold Merchandise to the Debtor on different credit terms based on the category of the Merchandise, which most often fell into the categories of non-generic pharmaceuticals ("Branded Pharmaceuticals") and generic pharmaceuticals ("Generic Pharmaceuticals"). Id. Payment for Branded Pharmaceuticals was due on the Friday of the week following the date of an invoice, while payment for Generic Pharmaceuticals was due on the sixth following Friday. Supply Agreement §§ 4.A and 4.B; Carnahan Decl. ¶¶ 41-42.
According to the Amended Complaint, the Supply Agreement entitled the Debtor to a rebate on certain purchases of Generic and Branded Pharmaceuticals if the Debtor was current on certain payment obligations to McKesson. Am. Compl. ¶¶ 20-21. The Plaintiff states that, pursuant to the Supply Agreement, "the Debtor paid [McKesson] for 'One Stop' generic merchandise ["OS Generic Merchandise"] by a two-step process: [f]irst, the Debtor paid McKesson's invoice, which was marked up by 20% over the manufacturer's invoice," and "[s]econd, [McKesson] paid a rebate of 16.667% on the Debtor's 120% payment, thereby eliminating the 20% mark-up entirely." Claim Opp'n. at 9. The Supply Agreement specifies the timing of the payment and rebate process, stating that the Debtor owed McKesson on the sixth following Friday for its purchases, and McKesson owed the Debtor its rebate fifteen days after the end of the month in which its purchases were made. Id.
The Plaintiff contends that the Debtor often received a "prebate" for all purchases during, and many before, the second half of each month, because McKesson often paid the Debtor the rebate before the Debtor was required to pay McKesson's invoice. Claim Opp'n. at 9. The Amended Complaint asserts that Section 21(M) was the only provision of the Supply Agreement requiring payment as a condition of...
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