Court Opinion

ID: 2976830
Source: CourtListenerOpinion
Date Created: 2015-09-22 17:58:20.800548+00
Date Added: 2024-06-11T15:38:18.660968
License: Public Domain

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                             File Name: 08a0470n.06
                              Filed: August 5, 2008

                                             No. 07-4286

                           UNITED STATES COURT OF APPEALS
                                FOR THE SIXTH CIRCUIT

In re: Spinnaker Industries, Inc.,                 )
                                                   )
        Debtor.                                    )
                                                   )
                                                   )
MARK STICKEL, Liquidation Agent for the            )
SKK Liquidation Trust,                             )
                                                   )
        Appellant,                                 )
                                                   )
v.                                                 )    ON APPEAL FROM THE UNITED
                                                   )    STATES DISTRICT COURT FOR THE
SP ACQUISITION, LLC, n/k/a SPINNAKER               )    SOUTHERN DISTRICT OF OHIO
COATING, LLC,                                      )
                                                   )
        Appellee.                                  )

        Before: MOORE and SUTTON, Circuit Judges; ALDRICH, District Judge.*

        SUTTON, Circuit Judge. While this case arises from a Chapter 11 proceeding, it amounts

to nothing more than a contract dispute over the meaning of an asset-purchase agreement—and

specifically whether the buyer’s capped obligation to pay no more than $1.25 million of the sellers’

professionals’ fees overlaps with, or is independent of, the buyer’s obligation to reimburse the sellers

for the cost of financing the debtor in possession during the bankruptcy, a cost that as it turns out

        *
         The Honorable Ann Aldrich, United States District Judge for the Northern District of Ohio,
sitting by designation.
No. 07-4286
In re Spinnaker Industries, Inc.

helped to fund some of the debtor-sellers’ professionals’ fees. Because the provision in the contract

mandating the repayment of the debtor-in-possession financing works in concert with, rather than

independently of, the agreement’s cap on assumed liability for professionals’ fees, the buyer has

fulfilled its obligations, and we affirm the district court’s grant of summary judgment in its favor.

                                                  I.

       In November 2001, Spinnaker Industries, Spinnaker Coating and Spinnaker Coating-Marine

each filed a voluntary petition for Chapter 11 bankruptcy, and, acting as debtors in possession, they

continued to operate their businesses during the consolidated bankruptcy proceeding. On January

4, 2002, the debtors filed a motion to sell substantially all of their assets, and on March 28, 2002,

they closed a sale of their assets to SP Acquisition, which later changed its name to Spinnaker

Coating, LLC (hereinafter “Spinnaker”).

       After the closing, at least one major category of costs—professionals’ fees—remained

unsettled. In March and April 2002, the estate professionals filed fee applications totaling

$1,877,629, and the bankruptcy court approved the applications. Consistent with the bankruptcy

court’s order, Spinnaker paid the debtors’ estate $500,479 to cover what it believed was its

remaining professional-fee obligation under the contract. Mark Stickel, the liquidation agent for the

debtors’ liquidation trust, read the contract differently, and after Spinnaker denied requests for more

fee payments, Stickel filed this adversary action in the bankruptcy court on September 13, 2004,

seeking an additional $749,521.

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No. 07-4286
In re Spinnaker Industries, Inc.

        Both parties moved for summary judgment. Spinnaker argued that it had fulfilled its fee

obligation, capped at $1.25 million under the asset-purchase agreement, through four transactions:

(1) its assumption of $377,684 in retainers that the debtors paid the professionals prior to petitioning

for bankruptcy; (2) its assumption of $247,845 in debt drawn down from the debtor-in-possession

financing to pay various professionals’ fees; (3) its direct payments to the professionals of $123,992

on April 8, 2002; and (4) its final $500,479 payment on May 20 to the debtors’ estate. Stickel

conceded that Spinnaker’s direct payments to the professionals counted toward its obligation, but

he maintained that neither the retainers paid by the debtors nor Spinnaker’s assumption of the

debtors’ bank-facility debt offset Spinnaker’s liability. The bankruptcy court granted partial

summary judgment to each party, holding that Spinnaker could credit the retainers but not the bank-

facility payments against the $1.25 million fee obligation. Spinnaker appealed the adverse ruling

to the district court, and the district court held that Spinnaker was entitled to credit the bank-facility

payments (to the extent they covered professionals’ fees) against its obligation. Stickel appealed that

ruling here.

                                                   II.

        Under the asset-purchase agreement, Spinnaker paid a fixed price and assumed some of the

debtors’ liabilities in exchange for substantially all of the debtors’ assets. Section 4 of the agreement

detailed which liabilities Spinnaker did and did not assume:

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No. 07-4286
In re Spinnaker Industries, Inc.

       4. Liabilities and Obligations
               (a) Non-Assumption of Liabilities. Notwithstanding anything to the contrary
               contained herein and except as expressly set forth in Section 4(b), Buyer does
               not assume and shall have no responsibility or obligation whatsoever for any
               liabilities, commitments or obligations of Sellers of any kind or nature
               whatsoever . . . .
               (b) Assumed Obligations. At the Closing, subject to the limitation set forth
               in section 4(c), Buyer shall assume the following liabilities and obligations
               (the “Assumed Obligations”) of Sellers:
                       (i) post-Petition trade payables and liabilities incurred in the Ordinary
                       Course of Business consistent with present practice in Sellers’ chapter
                       11 cases (including an aggregate of up to $1,250,000 for court-
                       retained professionals’ fees and reimbursement of Sellers for court-
                       approved amounts already paid, but excluding (x) any such
                       professionals’ fees in excess of such amount and (y) any amounts
                       payable to Deloitte Touche under Section 3 of this Agreement);
                       (ii) Sellers’ accrued pre-Petition liabilities for vacation, payroll,
                       payroll Taxes, real estate and personal property Taxes, customer
                       claims and rebates as set forth on Schedule 4(b)(ii) in an amount not
                       to exceed $2,593,000, to the extent approved by the Bankruptcy Court
                       and not satisfied before Closing;
                       (iii) key employee retention bonuses approved by the Bankruptcy
                       Court in an amount not to exceed $750,000, and obligations under
                       employee Contracts set forth on Schedule 7(d);
                       (iv) certain other pre-Petition liabilities set forth on Schedule 4(b)(iv)
                       in an amount not to exceed $2,475,000, to the extent approved by the
                       Bankruptcy Court and not satisfied before Closing;
                       (v) the liabilities and obligations of Sellers under the Assigned
                       Contracts that have accrued as of the Closing Date, including all Cure
                       Amounts with respect thereto (except for Cure Amounts the payment
                       of which would cause the Assumed Liabilities and DIP Payments to
                       exceed $23,763,000, in which case Sellers shall make payments to the
                       extent necessary to prevent such excess) and liabilities and
                       obligations of Sellers under purchase orders and supply contracts; and
                       (vi) other post-Petition liabilities and obligations that have accrued as
                       of the Closing Date in the Ordinary Course of Business, including but

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In re Spinnaker Industries, Inc.

                       not limited to employee-related obligations such as 401(k), pension,
                       health insurance, etc. (but not with respect to employees of SCMI).
               (c) Proceeds of Buyer Financing. The parties hereto acknowledge that Buyer
               contemplates arranging for the DIP Lenders to provide revolving and term
               credit facilities on terms and conditions equivalent to Sellers’ existing
               financing or with modifications thereto acceptable to Buyer in its sole
               discretion (the “Buyer Financing”). Buyer shall use all or a portion of the
               proceeds of the Buyer Financing (and any other funds required) to repay the
               total amount of principal, accrued interest and other charges on Sellers’
               debtor in possession financing with the DIP Lenders at Closing (the “DIP
               Payment”).
               (d) Limitation on Assumed Obligations. Notwithstanding the above, in no
               event shall the aggregate amount of the Assumed Obligations as of the
               Closing Date . . . and the DIP Payment exceed $23,763,000.

JA 164–65. Elsewhere in the agreement, the parties stipulated that New York law would govern the

contract, and in that State, as elsewhere, the court’s task is to discern the parties’ “purpose and

intent” and to stay within the “four corners of the document” if the contract’s terms are clear,

W.W.W. Assocs., Inc. v. Giancontieri, 566 N.E.2d 639, 642 (N.Y. 1990).

       This case turns principally on the interrelation of § 4(b)(i) and § 4(c). At closing, Spinnaker

agreed under § 4(b)(i) to assume the debtors’ post-petition trade payables and liabilities, including

their professional-fee obligations. And it agreed under § 4(c) to repay the total amount of principal

and interest the debtors incurred through their debtor-in-possession financing arrangement. The

question is this: Does § 4(b)(i)’s $1.25 million cap on Spinnaker’s professional-fee obligation apply

to professionals’ fees paid by the debtors with their debtor-in-possession financing facility? Like

the district court, we think it does for several reasons.

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No. 07-4286
In re Spinnaker Industries, Inc.

       First, the text of § 4(b)(i) supports this interpretation. It is the only provision of the contract

dealing with professionals’ fees, and it makes Spinnaker liable for only “$1,250,000 for court-

retained professionals’ fees” without regard to how those fees are initially paid or assumed. JA 164.

It refers to “an aggregate” of such fees, contemplating that the payments credited toward the cap

could be made at different times and in different ways, including through the funds provided by the

debtor-in-possession financing facility. Id. And the cap contains a belt-and-suspenders component

to it. After establishing the cap, the subsection says that Spinnaker’s assumed obligations include

“reimbursement” to the debtors for “court-approved amounts already paid . . . but excluding . . . any

such professionals’ fees in excess of” the cap. Id. The cap, in short, was a conspicuous limitation

on Spinnaker’s assumed obligations.

       Second, nothing in § 4(c) says that the debtors’ bank-facility payments to professionals

cannot count toward the cap in § 4(b)(i). The two provisions, we recognize, set forth distinct

financial obligations—as evidenced by the fact that § 4(d) limits Spinnaker’s ultimate exposure, as

measured by the combined sum of “the Assumed Obligations” and “the DIP Payment,” to

$23,763,000. JA 165. But nothing in the agreement says that these distinct obligations cannot

overlap or that they must operate without reference to one another.

       Third, the specific controls the general. See Muzak Corp. v. Hotel Taft Corp., 133 N.E.2d

688, 690 (N.Y. 1956).        The more specific references to professional-fee obligations in

§ 4(b)(i)—indeed the only references to the topic in the whole agreement—govern the more general

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No. 07-4286
In re Spinnaker Industries, Inc.

requirements of § 4(c), which do not rule out the possibility that fee obligations funded by the

debtor-in-possession financing may be credited toward the cap. In this sense, the two provisions do

not conflict but are interdependent. Debtor-in-possession financing covers precisely the liabilities

that Spinnaker assumed under § 4(b)(i). Under 11 U.S.C. § 364(a), debtors in possession can “incur

unsecured debt in the ordinary course of business” and the resulting unsecured creditors can claim

“administrative expense” priority for such loans. This financing option “permits the debtor to focus

its efforts on running its business, calming its employees and customers, and negotiating a plan of

reorganization with its creditors and other parties in economic interest.” 5 William L. Norton, Jr.,

Norton Bankruptcy Law & Practice 3d § 94:21 (2008). The types of debts allowable under “ordinary

course of business” debtor-in-possession financing, 11 U.S.C. § 364(a), overlap with Spinnaker’s

express assumption of “post-Petition trade payables and liabilities incurred in the Ordinary Course

of Business consistent with present practice in Sellers’ chapter 11 cases” under § 4(b)(i), JA 164

(emphasis added). Under these circumstances, it would seem strange to interpret the general debtor-

in-possession financing provision to eviscerate the specific professional-fee cap, especially where

that financing is designed to cover the categories of obligations assumed under § 4(b)(i).

       Fourth, a different interpretation would overlook our general obligation to give each

provision “force and effect.” Muzak Corp., 133 N.E.2d at 690. Spinnaker and the debtors entered

into the original asset-purchase agreement on January 18, 2002, and most of the debtors’

professional-fee payments occurred after that date. Under Stickel’s reading of the agreement, the

bank-facility-repayment clause would have allowed the debtors unilaterally to alter SP’s financial

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No. 07-4286
In re Spinnaker Industries, Inc.

obligations under the contract by changing the manner in which they paid the professionals’ fees.

On the one hand, if the debtors paid the relevant professionals’ fees directly (without drawing down

their bank facility) or delayed paying them at all (leaving the fees as “trade payables” or “liabilities”

owed by Spinnaker), then any sums Spinnaker paid in relation to those fees would have been

assumed “liabilities” or “reimbursement” of the debtors for “amounts already paid” that would have

counted toward the agreement’s cap under § 4(b)(i). On the other hand, Stickel’s interpretation

would have allowed the debtors to deprive Spinnaker of any benefit from the cap by simply paying

the total professional-fee bill (or even just $527,628 of it) with funds drawn from their bank facility.

        Nor is it just an end run around the professional-fee cap that this interpretation would allow.

In addition to the professional-fee cap, there are other liability caps in § 4(b), including a $750,000

cap on employee-retention bonuses, a $2.6 million cap on employee and tax liabilities and a $2.5

million cap on other specified liabilities, that address liabilities that may or may not be payable

through debtor-in-possession financing. Were Stickel’s interpretation of the contract correct, the

debtors might have rendered each of these caps a dead letter by paying those expenses through

debtor-in-possession financing. The parties have given us no reason why they would have treated

expenses paid with bank-facility funds differently from those paid directly or left unpaid. Our

obligation under New York law is to discern the parties’ “purpose and intent” from the “four corners

of the document,” W.W.W. Assocs., 566 N.E.2d at 642, and nothing in the agreement suggests that

the parties intended to design caps that could be so easily evaded.

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In re Spinnaker Industries, Inc.

                                       III.

       For these reasons, we affirm.

                                       -9-