Case No. 03-11540, (Jointly Administered).United States Bankruptcy Court, S.D. New York.
February 18, 2005
PACHULSKI, STANG, ZIEHL, YOUNG, JONES WEINTRAUB P.C., By: William P. Weintraub, Esq., Ilan D. Scharf, Esq., New York, Attorneys for the Debtors and Debtors in Possession.
NIXON PEABODY LLP, New York, By: Dennis J. Drebsky, Esq., Attorneys for WestLB, AG.
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POST-HEARING OPINION ON SPIEGEL’S OBJECTION TO CLAIMS 2239,2242,2246, 2250, 2256, 2264 and 2266 OF WESTLB, AG
CORNELIUS BLACKSHEAR, Bankruptcy Judge
Matter Before the Court
Before the Court is the Seventeenth Omnibus Objection to Proofs of Claim filed by Spiegel, Inc. and its affiliates (“Spiegel” or the “Debtors”) on September 24, 2004. WestLB, AG (“WestLB” or “Claimant”), filed a response to the motion on November 1, 2004, alleging that its proofs of claim for termination damages in the amount of $3,628,000.00 should be allowed. On November 19, 2004, Special Counsel for the Official Committee of Unsecured Creditors of Spiegel, Inc. filed a joinder to the Debtors’ objection to the claims of WestLB. On December 1, 2004, this Court heard oral arguments on the motion. The Court reserved its decision and directed the parties to submit post-hearing briefs. The following is the decision of the Court.
Rule of Law
The Motion is governed by 11 U.S.C. § 502(b)(1) and Rules 3001
and 3007 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”). Section 502(b) provides in relevant part:
Except as provided in subsections (e)(2), (f), (g), (h) and (i) of this section, if such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim as of the date of the filing of the petition, and shall allow such claim in lawful currency of the United States in such amount, except to the extent that —
(1) such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.
Facts and Procedural History
Spiegel, Inc. is a Delaware Corporation with a principal place of business located in Downers
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Grove, Illinois. On March 17, 2003 (the “Petition Date”), Spiegel, Inc. and its affiliates filed a voluntary petition for relief under chapter 11 of Title 11 of the United States Code, (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York. Presently, the Debtors operate their businesses as debtors and debtors-in-possession pursuant to 11 U.S.C. §§ 1107 and 1108. On March 24, 2003, the United States Trustee appointed an Official Committee of Unsecured Creditors (the “Creditors Committee”). On July 15, 2003, this Court entered an order establishing October 1, 2003 as the bar date for filing proofs of claim against the Debtors. On September 23, 2003, WestLB filed proofs of claim in the amount of $3,628,000.00 against Spiegel, Inc. and each affiliate company. According to WestLB, this amount represents damages suffered by WestLB as a result of the Debtors default under the Term Loan. WestLB contends that the Debtors’ bankruptcy filings triggered the default and as a result, WestLB incurred “breakage costs” associated with the termination of its interest rate swap agreement (the “Swap Agreement”) with a third party unaffiliated with the Debtors.
Discussion The Term Loan Agreement
On March 27, 1996, Spiegel, Inc. and its affiliates entered into an “Amended and Restated Senior Subordinated Term Loan Agreement (the “Prior Agreement”) in the principal amount of $35,000,000.00, (as amended, the “Existing Agreement”) with Westdeutsche Landesbank Girozentrale, the predecessor to claimant WestLB, (the “Predecessor”). Exhibit “B” of the Debtors’ Reply.
On June 30, 2000, Spiegel and the Predecessor changed the loan structure of the Existing Agreement from a senior subordinated
term loan to a senior term loan, (the “Term Loan Agreement”
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or the “Agreement”), and also extended the maturity date of the loan amount by seven years, from June 30, 2000 to June 30, 2007 Term Loan Agreement at 1; Exhibit “B” of the Debtors’ Reply.
The Loan was secured by a new promissory note, (the “Note”), which replaced and cancelled the notes issued under the Prior Agreement. Term Loan Agreement at 11; Exhibit “B” of the Debtors’ Reply. Pursuant to the terms of the Agreement, the Debtors were obligated to make quarterly payments on the Note at a fixed interest rate of 8.17% per year. Term Loan Agreement at 12.
Debtors’ Seventeenth Omnibus Objection to Proofs of Claim
The Debtors move to reduce, modify or expunge two classes of claims; Incorrect Amount Claims and Incorrect Amount Guaranty Claims. Debtors’ Seventeenth Omnibus Objection to Claims. The Debtors object to certain claims it describes as “Incorrect Amount Claims” because these claims overstate the amounts owed under the Term Loan Agreement. The Debtors likewise object to certain claims it describes as “Incorrect Amount Guaranty Claims” because the guaranty claims are overstated as well. Debtors’ Seventeenth Omnibus Objection to Claims. The Debtors request that this Court: (1) reduce each Incorrect Amount Claim and Incorrect Amount Guaranty Claim; (2) disallow any amounts due and owing under the Swap Agreements; and (3) allow the Incorrect Amount Claims and the Incorrect Amount Guaranty Claims only to the extent of the “Allowed Amounts” reflected on Exhibits “A” and “B” of the Objection. The Allowed Amounts include amounts due and owing under the Term Loans, on account of principal, interest and, to the extent applicable, legal fees due thereon. Debtors’ Seventeenth Omnibus Objection to Claims at 5.
WestLB’s Response to the Debtors’ Omnibus Objection to Proofsof Claim
WestLB and the Debtors agree that the parties executed a term loan agreement which was
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guaranteed by the Spiegel subsidiaries. WestLB’s Response at 2.
WestLB contends however, that it entered into an interest rate swap agreement with an “external counter-party” in conjunction with the Term Loan Agreement, and Spiegel either “knew about it or at least `tacitly acknowledged’ the swap arrangement.”WestLB’s Response at 3. WestLB adds that swap agreements are “typical market practice” when a lender engages in a fixed rate term loan transaction with a borrower over an extended period of time. Id.
WestLB argues that during pre-petition restructuring negotiations between Spiegel and various financial institutions, Spiegel “acknowledged the cost of terminating the swap agreement and its responsibility for breakage damages.” Id. at 4. To bolster its argument, WestLB provides exhibits of e-mail correspondence and affidavits to prove that Spiegel and WestLB discussed “the effect restructuring would have on the outstanding swap agreement, and how the adjustment of interest rates would compensate WestLB for breakage costs.” WestLB’s Further Reply to Spiegel’s Objection to Claims, ¶ 7 — ¶ 9 at 3. Lastly, WestLB argues that the damages were `foreseeable,’ because the Debtors knew that WestLB would suffer losses if the Loan Agreement were not performed as contemplated. WestLB’s Supplemental Post Hearing Response, ¶ 9 at 3. The Claimant requests an evidentiary hearing on the matter.
The Debtors’ Reply to the Response of WestLB
In their reply to WestLB, the Debtors argue that the Claimant has not met its burden of proof with respect to the validity of its claim. The Debtors argue that: (1) the Term Loan Agreement did not provide recovery for losses stemming from the Swap Agreement; (2) the Debtors never formally, nor tacitly agreed to cover any losses under a swap agreement, including compensation for “breakage
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costs;” (3) WestLB provides no evidence of the Debtors willingness to pay breakage costs; (4) WestLB provides no evidence to support the amount of damages that WestLB alleges it incurred; (5) the Term Loan Agreement does not indemnify WestLB for any losses associated with a swap agreement with an unaffiliated third party made outside the loan agreement; and (6) the Term Loan Agreement only makes the Spiegel entities liable for the reasonable costs of enforcing the Agreement. See Debtors’ Reply at 2-6. In sum, the Debtors maintain that it did not induce WestLB to enter into a swap agreement nor did it receive compensation for such an agreement. Debtors’ Reply at 6. The Debtors add that, the Swap Agreement was never contemplated under the Loan Agreement. The Debtors further argue that they were neither party to any such agreement, nor had privity of contract with either WestLB or the third party to the Swap Agreement. Debtors’ Reply at 7.
Analysis
This Court finds that the only governing document in this case is the Term Loan Agreement. It defines the relationship and obligations that bind WestLB and the Debtors. This Court finds that the Term Loan Agreement is devoid of any references to a swap agreement, therefore, the Debtors are not responsible for “breakage costs” associated with such an agreement, nor are the Spiegel subsidiaries obligated to indemnify WestLB for any damages allegedly arising from WestLB’s termination of the Swap Agreement with a third party.
This Court acknowledges the importance of interest rate swap agreements to commercial lenders. Congress has incorporated special provisions into the Bankruptcy Code involving parties rights under swap agreements. The legislative history of 11 U.S.C. § 560 is particularly instructive as it describes the mechanism and rationale for corporate swap agreements and illustrates how the
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Bankruptcy Code protects parties engaged in swap agreements with debtors. H.R. Rep. No. 484, 101st Cong., 2nd Sess. 3 (1990), reprinted in 1990 U.S.C.C.A.N. 223, 225. In this case, however, the discussion of parties rights under a swap agreement is inapplicable because the evidence clearly shows that WestLB and the Debtors never consummated a swap agreement in conjunction with the Term Loan Agreement. The Debtors were not parties to, nor signatories on WestLB’s third-party Swap Agreement. They had no privity of contract with any of the parties to the Swap Agreement. Additionally, there is no evidence to suggest that the Debtors `tacitly agreed’ to cover breakage costs. This Court finds it implausible to suggest that the Debtors are now obligated for termination damages on the third-party Swap Agreement because they allegedly made overtures `to approve’ certain `swap terms’ during restructuring negotiations. WestLB assumed the risk of entering into the Swap Agreement with the third-party, and it must now assume the responsibility for its own termination damages.
Conclusion
Accordingly, the Debtors Seventeenth Omnibus Objection to the Proofs of Claim filed by WestLB, AG is GRANTED. The Debtors will settle an order on five (5) business days’ notice consistent with this opinion.