CASE NO. 08-04457(SEK).United States Bankruptcy Court, D. Puerto Rico.
February 3, 2009
OPINION AND ORDER
SARA DeJESUS, Bankruptcy Judge
Soon after Beatriz Ready Mix, Inc. sought bankruptcy protection, it filed a motion to assume the unexpired lease over the locale where its cement and/or poured concrete manufacturing plant is located. At the same time, it filed a motion to reject the unexpired transportation agreement for hauling the raw materials used in this manufacturing process. The Lessor and the Trucker objected. We held an evidentiary hearing. When Debtor submitted its case, the Opponents asked for a judgment on partial findings under F.R.B.P. 7052 9014 and F.R.C.P. 52(c), choosing to submit the matter for resolution based on evidence received at that point.[1]
We grant the motion for judgment on partial findings for reasons that follow.
Factual Background
We summarize the agreed facts, adding pertinent ones elicited from credible testimony of the only witness, Mr. Antonio Joglar, and
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admitted documents.[2]
Back in 1999, Jos eacute; L. Torres, either personally or through one of his closely held corporations[3] , (collectively referred to as the “Seller”), decided to sell his concrete manufacturing business to the Debtor, (the “Buyer”). Mr. Joglar, an educated and experienced businessman who at the time also operated two other similar concrete manufacturing plants, negotiated the terms of the deal for the Debtor, assisted by counsel. The terms and conditions of the sale were drafted and executed on the same day, before the same Notary, in three separate documents identified as: (1) the Asset Purchase Agreement, (2) the Transportation Agreement, and (3) the Lease Agreement. As might be expected, each document referred to one of the transaction’s components, contemplated different considerations, and was executed by three distinct entities on behalf of the Seller. Each document also states the parties intended that the three documents be considered complimentary and interrelated agreements, or components of the one single transaction, that is, the sale of the business.[4] The components also contain cross default clauses.[5] At closing, the Buyer paid $2.5 million, the price set for the purchase of certain assets and good will. The lease and trucking components would produce a stream of
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payments over the next twenty years, now consisting of a $3,000 monthly lease installment and trucking fees set by the Comisi
oacute;n de Servicio P uacute;blico, a government entity that regulates the hauling in Puerto Rico.
Eight and a half years later, Debtor was in deep financial trouble, owing over $400,000 for hauling fees to the Seller. Stating that it could not satisfy these charges, Beatriz Ready Mix, Inc. filed this Chapter 11 petition on July 10, 2008, and remains a Debtor in possession. During August, Debtor filed the motion to assume the lease stating it did not owe any arrears, and required the site to carry on with its operations during the reorganization process. This was followed by Debtor’s motion rejecting the transportation agreement, as it was unable to satisfy the arrears. Debtor also asserted the materials could be hauled “by someone else who has a license”, identified by Mr. Joglar as the truckers providing this service to their other cement manufacturing plants. The Buyer objected and we held the mentioned hearing culminating with the request for entry of judgment under FRCP 7052.
Discussion
We have jurisdiction to resolve the controversies at hand pursuant to 11 U.S.C. § 1334(b) and 28 U.S.C. § 157(b)(1).
The “Seller” objects to the assumption and the rejection. Relying on contractual clauses, it argues these show the parties intended that the three documents be considered as components of one, interdependent transaction or unified deal, that can not be severed for purposes of assumption and rejection allowed by 11 U.S.C. § 365.
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The “Buyer” claims the contracts are not economically interdependent, but depict three separate and severable obligations. Furthermore, contractual clauses seeking to tie these contracts into a single unified obligation may be overridden under applicable nonbankruptcy law, or by the paramount equitable powers given to a bankruptcy court, paving the way for the assumption and concomitant rejection sought by the reorganizing Debtor.
Both parties agree that the Parole Evidence rule applies here.
A. Applicable nonbankruptcy law and the Parole Evidence Rule.
The parties chose to have controversies concerning the interpretation of documents evidencing the purchase solved according to the laws of the Commonwealth of Puerto Rico.[6]
Article 1233 of our Civil Code provides:
If the terms of the contract are clear and leave no doubt as to the intention of the contracting parties, the literal sense of the stipulations shall be observed.
If the words should appear contrary to the evident intention of the contracting parties, the intention shall prevail.
31 Laws of P.R. Ann. § 3471 (2000).
Our courts have stated that if the provisions of the contract are clear and unambiguous, its literal terms must be enforced. The courts must then “refrain from further speculation as to their alleged contractual intentions.” In re N500L Cases, 517 F. Supp. 816, 818 (D.P.R. 1981); Uni oacute;n de M eacute;dicos del CFSE, 2007 TSPR 35 (2007); Luce Co. v. Junta de Relaciones de Trabajo, 86 D.P.R. 425 (1962). “The only
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terms that can considered to be clear are those which in themselves are sufficiently lucid to be understood in one sense alone, without leaving any room for doubt, controversies or differences of interpretation, and without requiring for their understanding any reasoning or illustration susceptible to change.” Sucesi oacute;n Ram iacute;rez v. Tribunal,
81 P.R.R. 347 (1959). As our Supreme Court states, “the strict mandate of . . . art. 1233 obliges us to abide by the literal meaning of the terms of the contract when . . . they leave no doubt as to the intention of the contracting parties.” Marina Industrial v. Brown Boveri, Corp., 14 P.R. Offic. Trans. 86, 98 (1983).
If the Parole Evidence Rule applies to a controversy involving the interpretation of a clear and unambiguous contractual clause, then that clause cannot be explained or contradicted by evidence extrinsic to its contents. See Mercado-Garcia v. Ponce Federal Bank, 979 F.2d 890, 894 (1st Cir. 1992) and Rule 69(B), 32 Laws of P.R. Ann. App. IV R 69(b). Courts have also held that when the parties enter into an integrated agreement (meaning the agreement specifically states that all terms and conditions constituting the final intention of the parties have been included), the document is deemed complete and no extrinsic evidence may be considered. Nike Int’l., Ltd. v. Athletic Sales, Inc., 689 F. Supp. 1234, 1244 (D.C.P. 1988); Borschow Hospital Medical Supplies, Inc. v. C eacute;sar Castillo, Inc., 882 F. Supp. 236, 240 (D.P.R. 1995).
The Seller argues we can considering only the terms of the contracts when solving the parties’ intentions on severability of the deal’s three components. These terms show the parties intended that
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the three documents be considered as portions of one unified obligation that must be assumed cum onere. Since the documents’ integration clauses and the clauses concerning the parties’s intention are clear and unambiguous, the Buyer cannot introduce extrinsic evidence of intent to refute these clauses.
The Buyer claims the three documents “do not make reference to the economic interdependence among them”. The agreed purchase price for the assets was paid in full at closing. The consideration contained in the two other documents are still being paid. These differences, the Buyer claims, are sufficient to create an ambiguity as to the intention of the parties. The Buyer also argues the documents were drafted by Counsel for the Seller. Mr Joglar did not review these before execution. Consequently, these two circumstances placed the Buyer at a disadvantage, allowing us to construe any ambiguity against the Seller.
We find the words used in the tie-in clauses in all three documents are clear. The contractual language expressing the parties’ intent is not murky, or obscure. These expressions undoubtedly state the parties intended that the three documents complement each other, depicting the components of one single business transaction.
It is improbable that an experienced, educated businessman, who owned an operated two similar concrete manufacturing plants, and who was represented by counsel, would sign documents involving millions of dollars without first contributing his views, reading the final drafts and discussing the terms with his attorney. Therefore, we reject the Buyer’s version of this event.
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As to the Buyer’s argument concerning the lack of economic interdependence of the three components, it is just as likely for us to view the sale’s price as consisting of a down payment furnished by the $2.5 million for the value of the assets and good will component, followed by a stream of payment over the next twenty years, provided by the lease installments and hauling fees components.
Hence, we find the preponderance of the credible and admissible evidence here shows the tie-in clauses in the three documents demonstrate the parties’ true and unequivocal intent once they reached a meeting of the minds. These tie-in clauses clearly show the three contracts express the true intent of the parties: that is, the documents are but components of a single, interdependent, unified business transaction, and that the parties never intended us to consider the documents as three individual, separate, self-standing and severable contracts.
B. Tie-in and cross default clauses under Federal Bankruptcy law.
“Leasehold interests [and executory contracts] are governed in bankruptcy by section 365 of the Code, which provides, in pertinent part, that the trustee, subject to court approval, may assume or reject any executory contract or unexpired lease of the debtor.” Matter of Village Rathskeller, Inc., 147 B.R. 665, 671
(Bankr. S.D.N.Y. 1992).[7] “It is axiomatic that an executory contract generally must be assumed cum onere. [cit. omitted] A debtor cannot simply retain the favorable and excise the burdensome provisions of an
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agreement. [cit. omitted] Only certain contractual provisions, such as those expressly rendered unenforceable by the Bankruptcy Code, see, e.g., 11 U.S.C. § 365(e)(1), or those that are designed to thwart bankruptcy policies, are vulnerable. [cit. omitted]. In limited circumstances, however, a court may exercise equitable discretion to refuse to enforce a provision where `there is no substantial economic detriment to the [non-debtor counterparty] shown and where enforcement would preclude the bankruptcy estate from realizing the intrinsic value of its assets.'” (cit. omitted) In re Kopel, 232 B.R. 57, 63-64
(Bankr. E.D.N.Y. 1999). “However expansive the bankruptcy court’s power may be to protect the property interests of debtors-in-possession, it does not extend to enlarging the rights of a debtor under a contract or rewriting its terms.” (cit. omitted) In re EES Lambert Associates, 62 B.R. 328, 336
(Bankr.N.D.Ill. 1986). “. . . [T]he judge must look at the totality of the circumstances in order to do equity.” (cit. omitted) Village Rathskeller, 147 B. R. at 472.
Both parties acknowledge our decision involves a two-step analysis. First, we determine whether the tie-in clauses may be excised, and then we address the enforcement of the cross-default clauses.
As we understand Buyer’s view, these tie-in clauses thwart its reorganization, as the hauling component has become economically burdensome. The cost of maintaining the leasehold is feasible and retaining this asset is essential to the reorganization process. Our equitable powers under bankruptcy law allow us to excise the tie-in clauses in the lease and trucking documents, as these separate
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contracts are not economically interdependent and are therefore, severable.
Mr. Joglar testified that the Debtor is unable to cure the trucking arrears. However, at this juncture, there is no evidence to substantiate this bald statement. There is also no evidence that shows these related truckers can indeed haul the raw materials at affordable rates facilitating Debtor’s reorganization.
Next, we reject Debtor’s view concerning the economic interdependency of the contractual components. As we have explained, the sales price can be viewed as a $2.5 million immediate payment, and a stream of payments produced by leasehold installments and hauling revenues over the next twenty years.
Furthermore, most of the cases cited by the Buyer involve cross-default clauses in franchises with multiple lease contracts, where a Debtor seeks to reject locales that are burdensome, and retain those that are productive. The facts before us are distinguishable. We are not considering multiple leases with tie-in and cross-default clauses needed to operate a business under a franchise agreement. Debtor here cannot manufacture and sell its cement without the raw materials, whereas a franchisee in bankruptcy can reorganize without leasing a particular locale.
Nor are we persuaded to waive the strict compliance with the tie-in clauses by the Buyer’s reliance on In re UAL Corporation, 346 B.R. 456 (Bankr. N.D. Ill., 2006). There, the bankruptcy court was asked to find a cross-default clause conditioning the assumption of the unexpired airport terminal lease and use agreement, to debtor’s
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performance under separate agreements to make payments of certain bonds, unenforceable. The court reasoned there were no economic considerations linking the unexpired lease and use agreement to the separate bond payment agreements. Therefore, there was no basis for enforcing the cross-default clause. Id.
471. The transaction at hand consists of the sale of an entire business. The nature of this transaction is quite different from the transactions before the bankruptcy court in Illinois. Unlik UAL, supra, here, we are faced with excising two express links in the deal’s components: the tie-in clauses and the cross-default clauses. The three documents or components of the purchase before us show the deal involved all the integral parts of the concrete making business. In UAL, supra, the Court considered the lease and payment agreements of bonds. While the payment agreements facilitated the City of Chicago’s obligation to pay for terminal improvements at O’Hare Airport used by the reorganizing airline, these agreements were not integral parts of UAL’s business.
In synthesis, we find that consistent with the Buyer’s intention of acquiring the entire business, it obtained the business’ three interdependent components: its assets and good will, the leasehold and certain other equipment, and the means for hauling the needed raw materials. These are the integral parts of the sale’s price which the Buyer expects to receive. Consequently, all these circumstances show the deal’s components are not free-standing agreements, but portions of a single integrated transaction that Buyer/Debtor must assume cum onere.
Because Debtor has not met its initial burden of showing by a
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preponderance of the admissible evidence that the components of the deal are severable, we shall enter judgment by separate document denying its motions to assume and reject the components in question under FRBP 7052.
SO ORDERED, in San Juan, Puerto Rico,.
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INTENT OF THE PARTIES THAT THE AGREEMENTS ARE INTERRELATED CLAUSE
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INTENT OF THE PARTIES THAT THE AGREEMENTS ARE INTERRELATED AND CROSS-DEFAULT CLAUSE
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CROSS-DEFAULT CLAUSE
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ENTIRETY OF THE AGREEMENT CLAUSE
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CHOICE OF LAW CLAUSE
(DPR 2004).