In Consolidated Appeal, District Court Affirms Bankruptcy Court Finding That Pre-Petition Credit Agreement Was Properly Modified
In re Aurora Foods, Inc., C.A. No. 04-166 (GMS), 2006 WL 3747306 (D. Del. Dec. 19, 2006) (Judge Gregory M. Sleet)
W Top Hat, Ltd. was one of several lenders entering into a credit agreement with the Aurora Foods Inc. debtors prior to Aurora’s bankruptcy. The credit agreement was modified several times prior to the bankruptcy. W Top Hat commenced an adversary proceeding against the debtors, contending that the final pre-petition modification to the credit agreement was improperly made. The bankruptcy court granted the debtors’ motion to dismiss the adversary proceeding. W Top Hat also objected to confirmation of the debtors’ plan, contending that the debtors failed to make required payments under the credit agreement. The bankruptcy court overruled W Top Hat’s objection, and confirmed the plan.
W Top Hat appealed both the dismissal of the adversary proceeding and the decisions overruling its objection to the confirmation order. Those appeals were consolidated on W Top Hat’s motion.
On June 27, 2002, the credit agreement was amended to allow the debtors additional time to make certain principal payments under the agreement, as well as to impose an excess leverage fee. The excess leverage fee would be imposed if the debtor failed to make the required payment by September 30, 2003, or committed other events of default.
On February 21, 2003, the credit agreement was amended again. This amendment increased the excess leverage fee and added an asset sale fee. This fee required the same payment to each of the lenders if the debtors failed to meet certain increased targets of proceeds received from asset sales.
On October 13, 2003, the debtors entered into a further amendment to the credit agreement with a majority of the lenders; W Top Hat, however, was not a party to that negotiation and amendment. This amendment combined the excess leverage fee and the asset sale fee into one “Excess Leverage and Asset Sale Fee,” thereby reducing the aggregate amount of each fee. The combined fee was also capped at $15 million if payment of all principal, interest, and fees was paid to the senior secured lenders by March 31, 2004.
The debtors filed voluntary Chapter 11 petitions on December 8, 2003, and proposed a plan shortly thereafter. W Top Hat objected to the plan, arguing that the October 2003 Amendment was improperly entered into without W Top Hat’s participation and consent as it required the consent of all lenders, not just the Requisite Lenders, and that W Top Hat was entitled to a full share of the excess leverage fee. The bankruptcy court overruled the objection, holding that October 2003 Amendment was controlling, and that it limited the payments of fees occurring under the plan before March 31, 2004.
The debtors argued that the appeal should be dismissed because of equitable mootness, citing the Third Circuit’s 1996 In re Continental Airlines opinion, which provided that an appeal could be dismissed, even though some relief could be granted, when granting that relief would be inequitable. The court rejected this argument, finding that although the debtors’ plan was substantially consummated, W Top Hat sought a payment of $6.85 million out of total assets of some $930 million. Accordingly, if W Top Hat were to prevail, having to make this payment would be unlikely to cause the plan of reorganization to unravel. The court then, having decided that the appeal could proceed, addressed the merits of W Top Hat’s appeal.
The main issue in the appeal as to both the plan objection and adversary proceeding was whether section 10.6A of the credit agreement controlled, or whether the October 2003 Amendment controlled. The district court agreed with the bankruptcy court’s conclusion that this decision concerned which provision was specific, and which was general, bearing in mind that no provision should be rendered meaningless. Analyzing this question under the applicable New York law, the bankruptcy court had concluded that the provisions could be read together, with the specific provisions of the October 2003 Amendment trumping the general provisions of section 10.6A of the credit agreement. Under this reading, the general language of the credit agreement did not apply to the Excess Leverage and Asset Sale Fee governed by the October 2003 Amendment. The district court upheld this reading.
The district court also upheld the bankruptcy court’s finding that the prior course of performance among the parties showed that they understood that the credit agreement could be modified by a majority of the lenders, as opposed to all the lenders.
The district court also reviewed W Top Hat’s contention that the bankruptcy plan violated the best interests test of 11 U.S.C. § 1129(a)(7), and found it meritless. Having decided that the October 2003 Amendment controlled as between W Top Hat and the debtors, the district court agreed with the bankruptcy court that the creditors would do as well under the plan as they would have in a hypothetical Chapter 7 liquidation.
