The Honorable Christopher S. Sontchi, U.S. Bankruptcy Court Judge for the District of Delaware, grants the bankruptcy preference claim defendant’s motion for summary judgment holding that the supply agreement between the debtor and the defendant was both executory and properly assumed and assigned.  In the process, the Court rejected the trustee’s claim that the defendant’s refusal to sign a critical vendor agreement implicated a “nefarious intent to avoid preference liability”.

Kiwi – Executory and Assumed

The Third Circuit in Kimmelman v. Port Authority of New York and New Jersey (In re Kiwi International Air Lines, Inc.), 344 F.3d 311, 323 (3d Cir. 2003) established the defense now commonly know as the “Kiwi defense”. In the Kiwi decision, the Third Circuit held that that a trustee could not avoid payments made during the preference period under an executory contract that was “assumed and assigned” pursuant to Section 365 of the Bankruptcy Code.

The payments at issue before Judge Sontchi were made pursuant to a supply agreement (the “Supply Agreement”) between the debtor, Fluid Routing Solutions,  and the defendant Almond Investment Company (“Almond”). Judge Sontchi frames the questions before him as “whether the [Supply Agreement] is executory and whether it was, in fact, assumed or assumed and assigned.”  Judge Sontchi knifes through the trustee’s conventional arguments on both the facts and the law. 

 Nefarious Intent?

The trustee also raised the unique argument that the debtor’s offer to Almond of “critical vendor” status and the debtor’s refusal to sign a trade creditor agreement, a prerequisite to such status, created a equitable bar to the defendant’s assertion of a Kiwi defense.  Judge Sontchi soundly rejects the Trustee’s argument.

The Debtors requested that Almond enter into a Trade Agreement. Almond declined. The Trustee argues that, as a result of such conduct, the Debtors believed Almond to be a critical vendor rather than a counterparty to an executory contract. Whether a “critical trade vendor” is a vendor, supplier, liscensor, landlord, subcontractor, counter-party to an executory contract, etc., etc. is irrelevant. The basis and point of a critical trade order is to give a debtor authorization to pay pre-petition services or goods when necessary to preserve the debtor’s estate. Indeed, one of the primary bases for issuing the relief is to avoid having to inquire or to litigate the details of the relationship of the parties, e.g. executory contract or supply agreement, because there is no time to do so.

Furthermore, as is generally the case, there is no requirement that a vendor accept critical vendor status of a Trade Agreement offered by a debtor. Indeed, such a requirement would be well beyond the power of this court. Debtors only have so many entitlements. At most, the order in this case allows (not requires) the Debtors, in their discretion, to elevate a prepetition claim to an administrative priority claim and in doing so to use their best efforts to have those vendors enter into Trade Agreements. Nothing in the order requires a vendor to agree to the Trade Agreement or to consent to such treatment. The Trustee has presented no issue of material fact regarding an intent, nefarious or otherwise, in Almond’s refusal to enter into a Trade Agreement or to accept critical vendor payment.

Trustee is Estopped from Challenging Executory Nature of Supply Agreement 

Judge Sontchi also concluded that the Trustee is estopped from arguing that the Supply Agreement is not executory citing Superior Toy & Manufacturing Co., 78 F.3d 1169 (7th Cir. 1996):

As the Debtors in this case assumed the Supply Agreement with the Court’s approval and the assumption and assignment of the Supply Agreement was some portion of the sale consideration to the Purchaser (which provided a benefit to the estate), the Trustee’s argument that the Supply Agreement is not executory is barred by the doctrine of estoppel.

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