Sight Resource Corporation

1:04-bk-14987Ohsb22 sept. 2005

Texte intégral

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION
In Re
SIGHT RESOURCE
CORPORATION
Debtor
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Case No. 04-14987
Chapter 11
Judge Hopkins
MEMORANDUM DECISION DENYING, IN PART, MOTION
TO COMPEL PAYMENT OF BREAKUP FEE AND GRANTING, IN
PART, MOTION TO COMPEL PAYMENT OF BREAKUP FEE
This matter requires the Court to decide the merits on the Motion Of Cambridge
Eye Doctors/Vision World, Inc. To Compel Payment Of Break-Up Fee ("Motion")
(Doc. 345). The Motion is opposed by the Debtor and the Official Committee of
Unsecured Creditors ("UCC"). Oral arguments and evidence, in support of and against
the Motion, were presented on August 9, 2005.
The Court concludes that the matter before it is a core proceeding over which
it has jurisdiction pursuant to 28 U.S.C. § 157(b)(1), (b)(2)(A), (b)(2)(B), (b)(2)(O) and
This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: September 22, 2005
____________________________________________________________
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§ 1334.
FACTS
On March 7, 2005, Cambridge Eye Doctors/Vision World, Inc. ("Cambridge")
entered into an Asset Purchase Agreement ("APA") with the Debtor for the sale of
certain assets of the estate. See Cambridge Ex. A. The Debtor then filed a motion to
sell the assets at auction. The motion also contemplated that the Debtor would market
the APA to other potential buyers in order to attract competing bids for the Debtor's
assets. In the event that Cambridge did not prevail at the auction as the successful
bidder, the APA provides as follows:
The Sale Motion also shall ask that the Bankruptcy Court order the
[Debtor] to reimburse [Cambridge] for the actual out of pocket costs and
expenses incurred by [Cambridge] with financial consultants,
accountants, and legal counsel in relation to the transaction set forth
herein if any person or entity other than [Cambridge] is the successful
bidder. Reimbursement shall be limited to the lesser of [Cambridge’s]
actual expenses or $50,000.
Cambridge Ex. A at ¶ 8.1(c) (emphasis added). Attached to the sale motion was a
proposed notice that included, among others, the following bid procedure:
If and to the extent [Cambridge] is not the highest and best bidder, then
[Cambridge] shall be entitled from the proceeds of the closing of the sale
of the Assets to a break-up fee equal to the lesser of its actual expenses
or $50,000.
Cambridge Ex. B at 3. This proposed notice was thereafter approved by the Court.
See Doc. 215.
Unfortunately for Cambridge, it did not submit the highest bid and consequently
did not prevail at the auction. Thereafter, on April 14, 2005, Cambridge submitted an
invoice to the Debtor requesting a breakup fee of $50,000. The invoice provides as
follows:
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1. Confidentiality and Non-Disclosure Agreement 2.5 hours @ $250 $ 625.00
2. Letters of Intent
a. First Letter 7 hours @ $250 1,750.00
b. Second Letter 4 hours @ $250 1,000.00
3. Store Location Survey 8 hours @ $250 2,000.00
4. Call Creditors Committee Counsel 1 hour @ $250 250.00
5. Conferences\Calls SSG Capital Advisors 11.4 hours @ $250 2,850.00
6. Document Review
a. 25 Store Leases
b. 10 Doctor Agreements
c. 2 Professional Corporations
d. 2 Managed Care Agreements
e. 1 Stock Pledge Agreement 25 Documents @ $175 7,000.00
7. Financial Modeling 21 hours @ $250 5,250.00
8. Inventory Analysis 1,200.00
9. Asset Purchase Agreement 10 hours @ $250 2,500.00
10. Call Harvard Pilgrim 1 hour @ $250 250.00
11. Negotiations with Landlords 2.6 hours @ $250 650.00
12. Meetings with Local Management 12 hours @ $250 3,000.00
13. Trademark Litigation 6 hours @ $250 1,500.00
14. Trip to Sale Hearing 2 days @ $1,500 3,000.00
15. Corporate Administration 900.00
16. Telephone Expense 606.00
17. Delivery Expense 38.00
18. Travel Expense 1,054.00
19. Victor O. Buente, Jr., Legal Services 4,000.00
20. Daniel C. Cadle, Review and analysis, arrange bank financing, attend sale 20,000.00
TOTAL TO HOWELL KELLY $59,423.00
See Cambridge Ex. D.
Subsequently, the Debtor rejected Cambridge's request for reimbursement,
contending that most of the expenses invoiced by Cambridge did not constitute
reimbursement for the kind of "actual out of pocket costs and expenses" that fell within
the ambit of the APA. See Cambridge Ex. E.
To understand the Debtor’s position, it is necessary to understand the corporate
structure of Cambridge. Cambridge has two shareholders, Daniel C. Cadle and J.
Howell Kelly. See Debtor’s Exs. C-H. Messrs. Cadle and Kelly are also the sole
directors and officers of Cambridge. See Debtor’s Ex. I. Because the services itemized
on lines 1-15 and 20 of the Cambridge invoice were performed by J. Howell Kelly
and/or Daniel C. Cadle, the Debtor contends that these are not "out of pocket costs and
expenses" but services performed "in house." As for legal services performed by Mr.
Buente, itemized on line 19 of the invoice, the Debtor contends that this also represents
"in house" work because of the fact that Mr. Buente identifies himself as "General
Counsel" for Cambridge. See Cambridge Ex. D.
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The day after Cambridge learned of the Debtor’s rejection, the company
submitted three more invoices to the Debtor. This time the services of Messrs. Cadle,
Kelly and Buente were separately invoiced, with the letterhead of each invoice
reflecting that the services were performed on a consulting basis and in an individual
capacity rather than in any official capacity for Cambridge. Again the Debtor rejected
the request for payment and advised Cambridge to "send . . . copies of all relevant and
legitimate third-party invoices and cancelled checks." See Cambridge Ex. G. Unable
to convince the Debtor otherwise, Cambridge, on June 1, 2005, filed the instant Motion
seeking to compel payment of the breakup fee.
It is also important to note that Cambridge is a special purpose entity created for
the sole purpose of purchasing the Debtor’s assets. Cambridge had no assets until July
22, 2005, merely eighteen days prior to the hearing on the Motion, when Mr. Cadle
opened a checking account with a $60,000 deposit. On the same day, Cambridge
issued checks to Messrs. Cadle, Kelly and Buente in payment of the services for which
they invoiced Cambridge. See Cambridge Ex. H.
ISSUE
The sole question the Court must consider concerns whether Cambridge incurred
"out of pocket costs and expenses" so as to require the Debtor to "reimburse" all, or a
portion, of the $50,000 breakup fee as provided in the APA. The Debtor concedes that
line items 16-18 on the April 14, 2005 invoice (telephone expense, delivery expense
and travel expense), in the aggregate amount of $1,698, are reimbursable under the
APA. Therefore, the ultimate issue is whether services performed by Messrs. Cadle,
Kelly and Buente constitute "out of pocket" expenses, particularly when considering
that these individuals are principals of Cambridge and Mr. Buente identified himself as
general counsel for the firm.
ANALYSIS
Cambridge argues that the services at issue constitute "out of pocket costs and
expenses" because the services were performed "out of house" on a consulting basis
and paid by Cambridge as such. According to Cambridge, Messrs. Cadle, Kelly and
Buente billed Cambridge in an individual capacity, and Cambridge, in turn, issued
checks in payment of their invoices. The Debtor and the UCC argue that the consulting
invoices and the checks, both being generated after the Debtor rejected the initial
request for reimbursement–with the possible exception of the Kelly invoice, constitute
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an artificial attempt to obtain reimbursement for services that are not compensable
under the APA.
The Court agrees with the Debtor and the UCC. The consulting invoices and the
checks constitute a mere pretext for payment of services purportedly performed by
outside consultants. During cross examination, Messrs. Cadle and Kelly candidly
admitted their involvement in the attempt to reconstruct time records pertaining to
outside consulting services. Both conceded that there was no formal contract or
engagement between Cambridge and themselves to perform such services. Further,
Mr. Cadle, who deposited funds in the corporate account for the first and only time on
July 22, 2005, testified that he considered that to be a $10,000 capital investment and
a $50,000 loan to be reimbursed once Cambridge received the $50,000 breakup fee.
Thereafter, the following colloquy occurred between Mr. Cadle and Debtor’s counsel:
Q: So Mr. Cadle, if I understand this correctly, you essentially . . . lent to
yourself or invested $60,000 in yourself, fifty of which you apparently
borrowed from yourself and lent to yourself, so that you could show that
these expenses were reimbursed for purposes of the hearing today,
correct?
A: [Mr. Cadle] Absolutely, teetotally correct.
At bottom, the decision in this case does not turn on whether the ruse that
Cambridge erected to induce payment from the Debtor was valid or sustainable under
the law, but rather, whether Cambridge incurred reimbursable "out of pocket costs and
expenses" under the terms of the APA based on the original April 14, 2005 invoice
presented.
Each asset purchase agreement in a § 363 bankruptcy sale is a unique contract,
the terms of which are negotiated under an array of circumstances and from numerous
bargaining positions. Generally, judicial oversight into sales of the debtor's assets tends
to focus mainly on whether the sales themselves have a sound business purpose. See
Stephens Indus., Inc. v. McClung, 789 F.2d 386 (6th Cir. 1986); see also In re Tiara
Motorcoach Corp., 212 B.R. 133, 137 (Bankr. N.D. Ind. 1997)(Payment of a breakup
fee has been the subject of some debate, but most courts tend to authorize the
practice.). There is not an abundance of case law on the subject of what constitutes an
"out of pocket" expense incurred by an unsuccessful stalking horse bidder in a § 363
sale. In fact, the parties have not cited, and the Court is unaware of, any authority on
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1 In the most recent bankruptcy decision of the Supreme Court of the
United States to cite a dictionary definition, the Court looked to the
Random House Dictionary of the English Language. See Rousey v.
Jacoway, 125 S. Ct. 1561, 1566 (2005).
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point. As such, it is all the more important that the plain meaning of the negotiated
agreement control.
As noted above, the APA contemplates that Cambridge would be reimbursed for
its "actual out of pocket costs and expenses incurred . . . with financial consultants,
accountants, and legal counsel." The term "out of pocket" has been defined as follows:
"paid out or owed in cash; necessitating an expenditure of cash." See Random House
Unabridged Dictionary 1376 (2d ed. 1993).1 The Court has already concluded that the
checks to Messrs. Cadle, Kelly and Buente were a mere pretense. Thus, for all
practical purposes, Cambridge did not "pay out" or "owe in cash" based upon the
services of these individuals. Nor did the services "necessitat[e] an expenditure of
cash" since Cambridge was never going to be billed for these services except in
anticipation of this litigation.
Contracts for the sale of substantially all of the assets of a debtor under § 363,
in many ways, operate no different from other contracts, and the same time honored
principles of interpretation apply. Every contract must be construed in order to
effectuate the true intentions of the parties as gathered from the entire document.
Courts look, first and foremost, to the terms employed in an instrument in order to
ascertain the parties' intent.
The Court is not here concerned with the fairness of the APA. Bankruptcy
courts have no authority to make a new contract for the parties, or to strain at reaching
a different construction where the terms of the asset sales agreement are clear. Each
stalking horse bidder involved in a § 363 sale is free to negotiate for any terms it desires
for payment of a breakup fee, and to seek court approval of those terms as was done
in this case. If the stalking horse wants to save money by doing "in house" due
diligence, then it can try to negotiate for a breakup fee that is not contingent upon an
"out of pocket" expense clause. This is exactly what happened in In re CXM, Inc., 307
B.R. 94 (Bankr. N.D. Ill. 2004). There, the stalking horse bidder bargained for the
following breakup fee clause: "Seller shall pay to Purchaser the sum of $200,000 . . .
as compensation for the time, resources and costs committed or incurred by Purchaser
in its efforts to purchase the Purchased Assets." (emphasis added.) No similar terms
can be found in the APA. To the contrary, payment of the breakup fee under the APA
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2 Separate from the "out of pocket" expense issue, Cambridge
alternatively argued that the Debtor was estopped from contesting the
fees of Mr. Buente based upon the content of correspondence sent by
Debtor’s counsel to Mr. Buente. An April 14, 2005 letter from Debtor’s
counsel provides:
[I]t appears to me that [Cambridge’s] actual out of pocket
expenses are limited to . . . [the conceded expenses of
$1,698] and, assuming you billed [Cambridge], your legal
fees ($4,000) for a total of $5,698 in actual out of
pocket expenses. Of course, prior to the debtors’ payment
of this or any other amount, we will need to see copies of
the applicable invoices and the cancelled checks
evidencing payment.
Cambridge Ex. E (emphasis added). An April 18, 2005 email message from
Debtor’s counsel provides:
[A]s I indicated in my April 14 letter, so far the
reimbursable expenses appear to be $5,698 at best.
Whatever proves to be the correct amount, please send us
at your convenience copies of all relevant and legitimate
third-party invoices and cancelled checks so we can
evaluate [Cambridge’s] claim.
Cambridge Ex. G (emphasis added). Given counsel’s use of qualifying
language, highlighted above, the Court does not deem these statements
to serve as an admission. Moreover, "[e]vidence of . . . statements
made in compromise negotiations is . . . not admissible." See Fed. R.
Evid. 408.
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is directly contingent upon "out of pocket" expenses being incurred by Cambridge to
pay for professional services in relation to the transaction. In the Court's view, use by
Cambridge of its officers and general counsel to perform those services belie its
assertion that these individuals are entitled to reimbursement under the terms in the
agreement.
Because the language of the breakup clause in the case at bar only allows for
reimbursement of "actual out of pocket costs and expenses . . . with financial
consultants, accountants and legal counsel," the in-house services of Debtor's general
counsel, Mr. Buente, and principals, Messrs. Cadle and Kelly, do not qualify for
reimbursement under the plain meaning of the APA. Accordingly, the Court holds that
Cambridge did not incur "actual out of pocket costs and expenses" within the purview
of the APA based upon the services provided by Messrs. Cadle, Kelly and Buente in
connection with the transaction.2
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CONCLUSION
For the foregoing reasons, the Motion to Compel Payment of Breakup Fee will
be GRANTED to the extent of the breakup fee already paid to Cambridge by the
Debtor in the amount of $1,698 and DENIED as to the balance of the fees and
expenses requested.
Copies to:
Kyle R. Grubbs, Esq.
kgrubbs@fbtlaw.com
Louis F. Solimine, Esq.
louis.solimine@thompsonhine.com
Kenneth R. Cookson, Esq.
kcookson@keglerbrown.com
U.S. Trustee
ustpregion09.ci.ecf@usdoj.gov
###
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