The case In re Dura Auto. Sys., LLC, No. 19-12378 (KBO), 2021 WL 2456944 (Bankr. D. Del. June 16,2021), is a cautionary tale and reminder that creditors dealing with debtors in bankruptcy should ensure that any purported assumption or assignment of their contracts are in writing and approved by the bankruptcy court. A creditor in In re Dura Auto. Sys., LLC paid a heavy price for failing to get the assumption of their contract in writing and approved by the bankruptcy court.
Dura Automotive Systems, LLC (“Dura”) filed for Chapter 11 bankruptcy in October 2019. The case was later converted to a Chapter 7. Prior to filing for bankruptcy, Dura contracted with Plasti-Paint Inc. to paint vehicle roof rails and other related services. Plasti-Paint filed an unsecured claim in the bankruptcy case for approximately $3 million. Despite being owed $3 million, Plasti-Paint continued to provide services to Dura during the bankruptcy.
As part of the bankruptcy proceedings, Dura’s leading lender, Bardin Hill, purchased the company for $65 million in June 2020. As with any company sold in bankruptcy, certain executory contracts were assumed and assigned to Bardin Hill as part of the deal. Plasti-Paint's contracts were not assumed, assigned, or rejected as part of the sale. Plasti-Paint continued to provide services to Bardin Hill for several months after the sale. While the bankruptcy was still pending, Plasti-Paint sold its claims against Dura to Hain Capital Investors Master Fund Limited (“Hain”).
In October 2020, Hain filed an administrative expense claim with the bankruptcy court and asked the court to order Bardin Hill to pay $1.8 million as a cure amount under section 365(b)(1)(A) of the Bankruptcy Code based on an implied assumption of Plasti-Paint’s contract. Plasti-Paint asserted that the contract was assumed based on Bardin Hill and Plasti-Paints continued business together after Dura was sold. Hain argued that the parties conduct after the sale gave rise to an implicit assumption.
The bankruptcy court rejected Hain’s implied assumption theory and denied Plasti-Paints’ administrative expense claim. The court held that no assumption occurred and therefore no cure amount needed to be paid. The court pointed to section 365 of the Bankruptcy Code, which states that an executory contract may be rejected, assumed, or assigned to a third party. Federal Rules of Bankruptcy Procedure 6006 and 9014 further requires requests to assume, assign or reject an executory contract be made by motion. The court reasoned that since Dura never sought or received court approval to assign the contract to Bardin Hill, there effectively was no assumption or assignment of the contract. The court then cited to Third Circuit precedence, University Medical Center v. Sullivan (In re University Medical Center) [973 F.2d 1065 (3d Cir. 1992)], which held that “assumption must be approved. It cannot be presumed.”
There are a few courts that have recognized the theory of implied assumption of an executory contract or unexpired lease, but the majority of courts require express written assumption. It goes without saying, creditors should always have their agreements in writing, especially if bankruptcy proceedings are involved. Furthermore, they should always obtain court approval of any continued business dealings with a debtor in bankruptcy, regardless of what judicial circuit the bankruptcy court is located.
***The Bankruptcy Code can be hard to navigate. If you need assistance understanding how to safely proceed in Bankruptcy Court or out-of-court workouts, contact the experienced litigation attorneys at Goosmann Law in our Sioux City, Sioux Falls, and Omaha offices.
In re Dura Auto. Sys., LLC at 3
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