United States District Court, M.D. Tennessee, Nashville Division
O CORP CORPORATION (f/k/a ORECK CORPORATION) and O MERCHANDISING, LLC (f/k/a ORECK MERCHANDISING, LLC Appellants,
ROYAL APPLIANCE MANUFACTURING CO. and OAC ACQUISITION COMPANY, LLC, Appellees.
MEMORANDUM AND ORDER
ALETA A. TRAUGER, District Judge.
On March 5, 2014, the Bankruptcy Court signed an Order granting the Cross-Motion for Summary Judgment of Royal Appliance Manufacturing Co. ("Royal") and OAC Acquisition Company, LLC ("OAC") (together, "Appellees") in Bankruptcy Case No. 13-04006, Adv. Proc. No. 13-ap-90482. The Bankruptcy Court concluded that there was no dispute of material fact and that Appellees, as opposed to debtors O Corp Corporation ("O Corp") and O Merchandising, LLC ("O Merchandising") (together, "Appellants"), were entitled to judgment as a matter of law granting them ownership of certain merchandise returned by QVC, Inc.
Appellants have filed the instant appeal (Docket No. 1), and the accompanying record (Docket No. 2) and brief (Docket No. 7), to which the Appellees have filed a Response (Docket No. 11), and the Appellants have filed a Reply (Docket No. 18). The Appellees have filed a Sur-Reply (Docket No. 19), to which the Appellants have filed a Reply (Docket No. 22).
This matter is before this court on appeal pursuant to 28 U.S.C. § 158(a).
I. Background and Procedural History
Prior to entering bankruptcy, the Appellants manufactured and sold vacuums and related products under the "Oreck" brand name. QVC, Inc. ("QVC") was one of the Appellants' major customers. QVC purchased products from the Appellants and then resold those products by means of home shopping events that were broadcast on QVC's television network. The purchase orders between Appellants and QVC were denoted as "sale or return" transactions, pursuant to the Uniform Commercial Code ("UCC") and similar Pennsylvania law. Under such transactions, QVC was allowed to return (1) unsold merchandise and (2) customer-returned merchandise ( i.e., merchandise sold by QVC but subsequently returned to QVC by the purchaser) to the Appellants for either a return of cash or a credit on future purchases. In practice, this arrangement allowed QVC to purchase a large amount of merchandise, sell as much of that merchandise as possible during televised events, and then return the remaining merchandise for the equivalent of a partial refund. QVC typically paid the Appellants for purchased merchandise within a few days of delivery.
The Appellants declared bankruptcy on May 6, 2013. Prior to that date, QVC issued two purchase orders to the Appellants to obtain products for a televised home shopping event that was scheduled to be broadcast on July 28, 2013 ("QVC Event"). Purchase Order No. 763707 was for 31, 800 Oreck Axis vacuum cleaners, and Purchase Order No. 763964 was for 128, 000 Oreck upright inner vacuum bags (together, the "Merchandise"). Both purchase orders denoted the usual "sale or return" transactions. The Appellants obtained and utilized post-petition financing to manufacture and ship the Merchandise. The Appellants shipped all of the Merchandise to QVC by July 3, 2013.
On June 20, 2013, the Bankruptcy Court set the procedures for an auction and sale of substantially all of the Appellants' assets. The auction was a sale of the Appellants' business as a going concern. The "stalking horse bidder" selected by the Appellants had submitted a draft asset purchase agreement ("Original Stalking Horse APA"). The Original Stalking Horse APA contained no provisions specifically related to QVC. QVC objected because it was concerned about the level of protection offered by the general assumption of liability provisions. On June 19, 2013, the stalking horse added a new Section 1.4(e) ("Amended Stalking Horse APA"), which provided that the stalking horse would assume all of the Appellants' obligations to QVC, with no dollar limit. Pursuant to procedures established by the Bankruptcy Court, the Amended Stalking Horse APA became the form of asset purchase agreement upon which other prospective purchasers were required to base their bids.
Also on June 20, 2013, the Appellants, QVC, and the stalking horse agreed to amend the terms of the outstanding purchase orders ("QVC Settlement") to increase the payment reserve from zero to forty percent. As part of the QVC Settlement, those parties also (1) reaffirmed that the purchaser of the Appellants' assets would assume all of the Appellants' obligations under the purchase orders, including the obligations for returns and warranties, and (2) agreed to require that the Appellants purchase infringement and recall insurance before QVC made any payment to the Appellants for the Merchandise. Delays in meeting these additional conditions excused QVC from making any payment for the Merchandise until late November 2013.
Thereafter, the Appellees submitted their own draft bid ("July 1 APA"), which borrowed substantially from the Amended Stalking Horse APA. Section 1.1 of the July 1 APA stated that the Appellees were purchasing, inter alia, "... all of the assets utilized by the Sellers in or relating to the Business... including all of the Sellers' right, title, and interest in, to and under any and all physical and/or technology-based assets, properties and right of the Sellers of every kind, nature and description, real, personal or mixed, tangible or intangible, known or unknown, wherever located..., " and that "the Sellers expressly agree that the sale of the Purchased Assets constitutes a transfer of all of the Sellers' right, title and interest with respect to the Purchased Assets...." Section 1.1(q) stated that the Purchased Assets include all assets which are not Excluded Assets, including "all other assets owned or controlled by the Sellers or their Affiliates necessary, appropriate, or desirable to operate the Business as [it] is being currently conducted."
The July 1 APA exempted certain specific assets - the "Excluded Assets" - from the "Purchased Assets" to be sold by the Appellants. Section 1.3(a) excluded cash and cash equivalents owned by the Appellants at closing. Section 1.4(b) excluded the Appellants' "Contract[s], " which were separately defined by the July 1 APA as "any agreement, contract, lease, consensual obligation, promise or undertaking (whether written or oral and whether express or implied), whether or not legally binding." By means of Section 1.4(e), the Appellees agreed to include the assumption of liabilities to QVC. The Appellees also agreed to the terms of the QVC Settlement, which was ultimately included in the Final APA as Schedule 1.3(n).
The Appellants' sale auction occurred on July 8, 2013. The Appellees outbid the stalking horse bidder by over four million dollars, with a final winning bid of $17, 250, 000. By that time, however, QVC had yet to pay for or return the Merchandise, and it became clear to the parties that payment would not be received from QVC by the date of the Closing. In preparing the Final APA, the Appellants began utilizing calculations that excluded the money owed by QVC for the Merchandise ("QVC Cash Receivables") from Purchased Assets. The Appellants informed the Appellees that the stalking horse bidder had agreed to exclude the QVC Cash Receivables, but the Appellants conceded that this may not have been adequately conveyed to the Appellees as part of the auction process. Nevertheless, the Appellants requested that the Appellees agree to modify the July 1 APA, by adding Section 1.3(n), so that the QVC Cash Receivables would be an Excluded Asset (rather than one of the Accounts Receivable which was a Purchased Asset). The Appellees agreed to do so. No provision was added concerning any returned Merchandise.
Around the same time, the Appellants provided a Working Capital Statement to Royal pursuant to Section 6.1 of the Final APA. The Working Capital Statement did not include the value of the Merchandise. Appellees did not question the contents of the Working Capital Statement.
The Bankruptcy Court approved the Final APA on July 22, 2013. The Final APA included Sections 1.1, 1.1(q), 1.3(a), 1.4(b), 1.4(e) and Schedule 1.3(n) from the July 1 APA. On July 24, 2013, the parties ...