Docket: Case No. 16-10083-399 (Jointly Administered)
Court: United States Bankruptcy Court, E.D. Missouri; April 15, 2016; Us Bankruptcy; United States Bankruptcy Court
The Memorandum Opinion by Bankruptcy Judge Barry S. Schermer addresses the Debtors' Motion to reject the Sherwin Contract, a long-term bauxite sales agreement between Noranda Bauxite Ltd. (NBL) and Sherwin Alumina Co. LLC (Sherwin). Both parties are Chapter 11 debtors, with NBL filing in the Eastern District of Missouri and Sherwin in the Southern District of Texas. NBL seeks to reject the contract, claiming a projected loss of $16.5 million in 2016, while Sherwin argues that rejection could jeopardize its business and result in 575 job losses.
The court grants the Rejection Motion, effective February 8, 2016, confirming the Sherwin Contract as executory and noting its significance to NBL's operations, which include mining bauxite for both its own use and third-party sales. The court emphasizes the importance of a debtor's ability to reject burdensome contracts in bankruptcy, which aids in the reorganization process. The standard applied is the business judgment test, which assesses whether the rejection serves the best interest of the debtor's estate, without requiring the court to evaluate the business merits of the decision in detail. The court cites relevant case law to support its conclusions.
The Eighth Circuit's business judgment test consists of two main components. First, a lease assumption must demonstrate sound business judgment that benefits the bankruptcy estate. The bankruptcy court serves as an overseer of the trustee or debtor-in-possession's management rather than as a dispute arbiter. Second, the court should not intervene in the business judgment of the trustee or debtor-in-possession unless there is evidence of bad faith or gross abuse of discretion. If a trustee's request is reasonable and not made in bad faith, the court typically grants approval if the action appears to benefit the debtor's estate.
Sherwin contends that a balancing of the equities test should apply due to both parties in the Sherwin Contract being debtors in bankruptcy. However, the cited support for this position comes from an outdated case, In re Midwest Polychem, which is not binding authority. Midwest Polychem involved a debtor's request to reject a contract with a restrictive covenant to compete with another debtor, but the court ultimately denied the rejection for lacking business or equitable sense. Sherwin’s additional references to other old cases from a non-binding jurisdiction also rely on the business judgment test.
Furthermore, Sherwin asserts that the damages to the counterparty should be considered under the business judgment test, but this interpretation contradicts binding authority, which does not require the consideration of counterparty interests when allowing contract rejections. Cases cited by Sherwin have been discredited by other courts, emphasizing that the application of the business judgment standard must be met without incorporating counterparty interests.
Sherwin's cited cases suggesting a need to consider counterparty interests under the business judgment rule are rejected. The primary focus is on the interests of the debtor and its estate, as the Bankruptcy Code does not provide specific protections for non-debtor parties unless explicitly stated. Sherwin claims this case is extraordinary due to simultaneous assumption and rejection motions by two debtors, but precedents like N.L.R.B. v. Bildisco and Mirant Corp. only apply a heightened standard in limited circumstances where federal regulatory interests are at stake—none are present here. Sherwin's desire to preserve its contract does not invoke a public interest warranting deviation from the standard rules. The Bankruptcy Code does offer special provisions for certain contracts, but none address the situation where a counterparty's ability to assume a contract is jeopardized by another debtor's rejection. While sympathetic to Sherwin's position, the court emphasizes adherence to established business judgment standards without allowing public policy exceptions to undermine the process.
NBL has successfully demonstrated that rejecting the Sherwin Contract aligns with sound business judgment and serves the best interests of its estate, primarily to facilitate restructuring efforts. Evidence indicates that NBL incurs significant financial losses on bauxite shipments under the Sherwin Contract, with losses projected to total approximately $16.5 million in 2016 if the contract is maintained. Rejection of the contract would potentially reduce these losses by about $6.8 million.
Testimonies from NBL’s Vice President and Chief Restructuring Officer, along with supporting Debtors’ Exhibits 16 and 24, provide detailed financial analyses comparing outcomes with and without the Sherwin Contract, considering various cost structures. Although NBL would continue to incur losses supplying only to Gramercy post-rejection, expert testimonies assert that this decision would position NBL more favorably for future customer acquisition, as the Sherwin Contract is not essential to its business strategy.
Attempts by Sherwin to contest these findings through its expert, Gabriel Henn, were largely unsuccessful. Henn's adjustments to NBL's financial calculations lacked credible support, and many of his claims were based on subjective assessments rather than evidence. Consequently, the court found that NBL's rejection of the Sherwin Contract constitutes sound business judgment that would benefit its estate.
Mr. Henn adjusted NBL’s estimated savings from rejecting the Sherwin Contract by $516,000, which he acknowledged was based on his opinion rather than evidence. He did not dispute that NBL, with its greater information, could provide a more informed perspective. His proposed $127,000 adjustment for PR and Communications costs reflected his belief that NBL should alter its business practices. For a decrease of over $2.5 million in Contract Miner Costs, he failed to counter the argument that NBL had superior knowledge regarding mining cost impacts.
Regarding Salaries, Wages, and Benefits, Mr. Henn could not clarify his $712,000 adjustment compared to NBL's $700,000, while a ruling confirmed they were effectively the same. He also suggested a $3.1 million addition for redundancy costs linked to government mandates, neglecting alternatives NBL had considered, like reducing work hours. He was unclear on whether these redundancy claims would be pre-petition or post-petition, affecting their implications.
Overall, Mr. Henn's calculations appeared to lack adequate support and were based on personal experience rather than thorough research. Attempts by Sherwin to undermine NBL’s calculations through cross-examination and document submissions, including a 2014 SEC filing, were unconvincing and not applicable to NBL’s current circumstances. The substantial evidence from NBL’s exhibits and witness testimonies demonstrated that rejecting the Sherwin Contract was a sound business decision. Sherwin criticized the decision-making process for lacking formal steps, arguing for the formation of committees and thorough analysis before pursuing rejection, suggesting that the decision did not adequately consider potential creditor recoveries or future projections.
The decision to reject the Sherwin Contract was made collaboratively by NBL's management, demonstrating a thoughtful and careful approach without the need for additional steps. Sherwin's concerns about the financial analysis being limited to 2016 and not considering the potential size of its rejection damages claim were found to be unfounded. The support of the Committee of Unsecured Creditors and the Debtors' lenders for the rejection request reinforces its validity. NBL's intent to potentially sell bauxite at a higher price, regardless of securing another customer, aligns with sound business judgment, and there was no evidence of bad faith or abuse of discretion in seeking to renegotiate contract terms. Although Sherwin argued that rejection would harm its operations and jobs, the business judgment test prioritizes the estate's benefit over the counterparty's interests. The long-term sales agreement between NBL and Sherwin is officially rejected as of February 8, 2016, with any claims resulting from this rejection to be filed according to Bankruptcy Rule 3003(c). Sherwin must either cease operations, negotiate less favorable terms with NBL, or adapt its refinery to use bauxite from alternative suppliers. NBL's leverage in rejecting the contract is recognized, as its sales to third parties outside of the Sherwin arrangement are minimal.
