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Executoriness for Purposes of Kiwi Defense to Preference Action Determined on a Contract by Contract Basis; Purchase Orders Issued under Master Agreement Were Separate Divisible Contracts

PIRINATE Consulting Grp., LLC v. C.R. Meyer & Sons Co. (In re NewPage Corp.), No. 13-52429 (KG), 2017 WL 571478 (Bankr. D. Del. Feb. 13, 2017)

The Litigation Trustee (“Trustee”) of the NP Creditor Litigation Trust brought this adversary proceeding against C.R. Meyer & Sons Co. (“CRM”) seeking to avoid and recover over $2.3 million in alleged preferential transfers.  NewPage Corporation (“NewPage”) and its affiliates (collectively, “Debtors”) operated paper mills throughout the United States, and CRM handled maintenance and construction at the Escanaba, Michigan and Duluth, Minnesota mills.  Prior to the Debtors’ bankruptcy filing, the parties entered into a Master Construction Agreement (“Master Agreement”) pursuant to which CRM would provide services and items necessary to complete the work described in purchase orders to be issued from time to time under the agreement.  The Master Agreement refers to each purchase order issued by NewPage as a separate contract, and the purchase orders either reference the Master Agreement directly or through another purchase order.  In the course of the parties’ dealing, the purchase orders served to document work and facilitate payment.

CRM moved for summary judgment pursuant to the Third Circuit’s decision in In re Kiwi International Air Lines, Inc., 344 F.3d 311 (3d Cir. 2003), which held that assumption of a contract under section 365 of the Bankruptcy Code barred a preference claim.  For a discussion of the Kiwi defense from a recent Delaware Bankruptcy Court Opinion, see our blog post here.  CRM submits that the Master Agreement and all related purchase orders are one single contract that was assumed under the “Catchall Provision” of the Debtors’ plan, which automatically assumed all unexpired executory contracts not otherwise rejected.  The Trustee filed a cross-motion for summary judgment on the grounds that the agreements are separate and distinct.

Judge Gross first considered whether the Master Agreement and related purchase orders constitute one entire agreement or separate divisible agreements.  State law determines whether an agreement is divisible or indivisible for purposes of assumption under section 365 of the Bankruptcy Code.  Under both Michigan and Wisconsin state law, the parties’ intention is the primary consideration in analyzing the divisibility of contracts.  Because the Master Agreement provides that the price for the work discussed in each purchase order is the “Contract Sum” stated in each individual purchase order, and the purchase orders set different prices and consideration for distinct jobs, the Court found that the parties clearly intended to form separate agreements.

The Court next considered whether any of the agreements were assumed under the Debtors’ plan such that the alleged preferential transfers are protected by the Kiwi defense.  Because the Master Agreement and related purchase orders are separate divisible agreements, the executoriness must be examined on an agreement by agreement basis.  The Court held that CRM did not meet its burden to establish that the individual purchase orders were executory.  With respect to the Master Agreement, the Court determined that the agreement imposes material obligations on CRM and NewPage that were executory on the Petition Date.  For instance, CRM had an obligation to provide engineering and servicing items in order to complete pre-petition purchase orders and complete work on schedule.  CRM was also required to maintain certain types of insurance during the pendency of work.  Likewise, the Debtors were required to comply with payment terms in the purchase orders as well as reimburse CRM for certain expenses, and both parties were under an obligation to maintain confidentiality.  Because the Master Agreement was executory, it was assumed under the plan.

Accordingly, the Court granted partial summary judgment in favor of the Trustee as to the divisibility of the agreements and partial summary judgment in favor of CRM as to the assumption of the Master Agreement.  The Court did not have sufficient evidence to determine whether and which purchase orders were executory and thus whether related payments are protected by the Kiwi defense.