Ambiguous Plan Provisions Would Not Be Interpreted To Deny Potential Administrative Claimant Its Right To Payment In Full
Forklift LP Corp. v. iS3C, Inc. (In Re Forklift LP Corp.), 363 B.R. 388 (Bankr. D. Del. 2007) (Judge Peter J. Walsh)
In connection with pending litigation over a failed post-petition software upgrade, the plaintiff asserted that even if its challenge to defendant’s right to payment was unsuccessful, the defendant’s administrative claim was subject to the provisions of the confirmed Plan, which, the plaintiff contended, resulted in defendant receiving less than full payment. Defendant moved for partial summary judgment on its right to receive payment in full, arguing that the Plan was ambiguous. The Court agreed, and held that the ambiguity in the Plan would not deny defendant its right to payment in full in light of the clear language of the Confirmation Order, the Disclosure Statement and the doctrine of judicial estoppel.
After the Debtor filed for bankruptcy in April, 2000, it sought an order authorizing retention of the Defendant, iS3C Consultancy Services Ltd., as a computer consultant in connection with a proposed software upgrade. The budgeted amount for the upgrade was approximately $450,000. Several milestones were to be achieved, but the Defendant ceased work prior to completing all the milestones. The parties disputed which party was responsible for the failed upgrade.Thereafter iS3C filed an administrative claim for $458,470.08. Prior to plan confirmation, the Debtor objected to iS3C’s claim and filed an adversary action seeking disgorgement of amounts previously paid to iS3C. Neither the claim objection nor the adversary were resolved prior to plan confirmation, but the debtor represented to the Court that the Plan provided means to pay iS3C’s claim in full if it were allowed at a later date. The Court thereafter confirmed the Plan.
In an effort to avoid administrative insolvency and conversion of the case, some of the administrative claim holders, but not iS3C, agreed to receive deferred distribution from the proceeds of avoidance actions, thereby giving up the right to receive full payment as required by 11 U.S.C. § 1129(a)(9)(A). As it turned out, holders of these “Allowed Deferred Claims” would receive only 10% of their claims. At the crux of the dispute between the Debtor and iS3C was the fact that the Plan provided that any claim that was allowed subsequent to the Effective Date of the Plan was, by definition, an “Allowed Deferred Claim. Of note, however, was the inconsistency that distributions were only to be received by “Allowed Deferred Claims that have agreed to a deferred Distribution.” In this Motion for Partial Summary Judgment by iS3C, the Court was only asked to determine whether, if iS3C’s claim were ultimately allowed, whether it would be entitled to full payment or whether it would be entitled to the 10% return being made to Allowed Deferred Claims.
The Debtor argued that because iS3C’s claim had not been allowed as of the Effective Date of the Plan, the claim was an Allowed Deferred Claim and therefore subject to the distribution schedule and reduced payment. However, the Debtor offered no explanation for how iS3C would fit into a distribution to “Allowed Deferred Claims that have agreed to a deferred Distribution.”
The Defendant argued that while its claim was not allowed prior to the Effective Date, it did not fit into one of the categories of creditors who were to receive deferred distributions and therefore it did not have an Allowed Deferred Claim.
The Court noted the “troublesome contradiction” between terms of the Plan, and noted that allowing iS3C anything less than payment in full would be contrary to 11 U.S.C. § 1129(a)(9)(A).
The Court therefore found that the Plan was ambiguous and looked for other ways to interpret its provisions. Ultimately the Court focused on three methods of interpretation to resolve the dispute: (1) review of the confirmation order; (2) judicial estoppel; and (3) review of extrinsic evidence of the Debtor’s intent when drafting the Plan.
Looking at the confirmation order, which the Court held to take precedence over contradictory language in the Plan, the Court noted the factual finding that the Plan complied with 11 U.S.C. 1129(a)(9) by providing for payment in full of administrative claims on or as soon as practicable after the Effective Date.
The Court observed that the confirmation order was not the only document that stated that the plan conformed with Section 1129(a)(9)(A). Indeed, in the Debtor’s own Memorandum in support of plan confirmation, it proposed that the Plan conformed to the requirements of 1129(a)(9). Noting that this statement “directly contradicts” plaintiff’s argument that iS3C’s claim was to be paid over time and in a reduced amount, the Court applied the doctrine of judicial estoppel to preclude the Debtor from “chang[ing] the argument to its own advantage to avoid paying Defendant in full.”
Turning to an examination of extrinsic evidence of the Debtor’s intent, the Court again found that the confirmation order, supporting memorandum, and, in addition, the Debtor’s own disclosure statement, all provided for payment in full to administrative claimants. The Court cited favorably the rule that ambiguities are to be resolved against the party drafting the contract, and found that the extrinsic evidence of the Debtor’s intent supported the conclusion that iS3C would be entitled to payment in full if its claim were ultimately upheld.
The Court therefore granted iS3C partial summary judgment on that point, and entered an order requiring the Debtor to pay iS3C in full as soon as practicable after the claim was allowed, if ever.
