Case: 11-13671-JMD Doc #: 304 Filed: 03/06/12 Desc: Main Document Page 1 of 9 UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW HAMPSHIRE In re: Kingsbury Corporation Donson Group, Ltd. Ventura Industries, LLC Debtors. Bk. No. 11-13671-JMD Bk. No. 11-13700-JMD Bk. No. 11-13687-JMD Jointly Administered MOTION FOR AUTHORITY TO REJECT SETTLEMENT AGREEMENT BETWEEN KINGSBURY CORPORATION AND CITY OF KEENE PURSUANT TO 11 U.S.C. 365 Kingsbury Corporation (the Debtor or Kingsbury ), a debtor and debtor in possession in the above-captioned chapter 11 cases, files this motion (the Motion ) by and through its counsel seeking authority to reject the Settlement Agreement (the Settlement Agreement ) between the Debtor and the City of Keene, New Hampshire (the City ) in relation to settlement of a Board of Tax and Land Appeals ( BTLA ) appeal, a 2010 abatement request, and a 2011 assessment. In support of this Motion, the Debtor states as follows: I. JURISDICTION AND VENUE 1. The Court has jurisdiction over the Motion pursuant to 28 U.S.C. 157 and 1334. This is core proceeding within the meaning of 28 U.S.C. 157(b)(2). Venue is proper before this Court pursuant to 28 U.S.C. 1408 and 1409. The statutory predicates for relief include 11 U.S.C. 105(a), 365. II. BACKGROUND 2. On September 30, 2011 (the Petition Date ), Kingsbury and Ventura Industries, LLC ( Ventura ) each filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code in this Court. On October 3, 2011, Donson Group, Ltd. ( Donson ) (collectively, with 1
Case: 11-13671-JMD Doc #: 304 Filed: 03/06/12 Desc: Main Document Page 2 of 9 Kingsbury and Ventura, the Debtors ) filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. 3. Pursuant to an Order entered on October 6, 2011, the Debtors cases are jointly administered under Case No. 11-13671. 4. On October 18, 2011, the United States Trustee appointed the Official Committee of Unsecured Creditors (the Committee ) to represent the interests of all unsecured creditors of the Debtors. 5. Prior to the Petition Date, in 2010, Kingsbury filed an application for abatement with respect to certain real property located at 80 Laurel Street, Keene, New Hampshire (the Real Property ); Kingsbury sought, via the abatement, a reduction in the tax-assessed value of the Real Property in relation to 2009 property taxes (the 2009 Abatement Request ). Specifically, the Debtor sought a reduction from the original 2009 assessment of $5,963,700 to $3,770,960. In response to the 2009 Abatement Request, the Board of Assessors (the Board of Assessors ) of the City granted a reduction in the tax-assessed value of the Property, but only from $5,963,700 to $5,647,000. A true and correct copy of the letter from the Board of Assessors to Kingsbury is attached hereto as Exhibit A. 6. The Debtor subsequently and timely appealed the 2009 Abatement to the Board of Assessors to the BTLA under Docket Number 25348-09PT (the Appeal ). 7. In 2011, the Debtor filed an application for abatement with respect to the Real Property, seeking a reduction in the tax-assessed value of the Real Property for the 2010 tax year (the 2010 Abatement Request ). Pursuant to a letter dated May 16, 2011, the Board of Assessors informed the Debtor that no decisions relating to 2010 abatement applications would be rendered until after the City s commercial revaluation project for 2011 was completed. A true and correct copy of the letter dated May 16, 2011 is attached hereto as Exhibit B. 2
Case: 11-13671-JMD Doc #: 304 Filed: 03/06/12 Desc: Main Document Page 3 of 9 8. Subsequent to sending the May 16, 2011 letter, the Debtor and the City entered into a settlement relating to the 2009 Abatement Request, the 2010 Abatement Request, and relating prospectively to any 2011 abatement request. A true and correct copy of the Settlement Agreement is attached hereto as Exhibit C. As set forth in the Settlement Agreement, the assessment of the Real Property for 2009 and 2010 tax years was established at $4,238,100. Under the Settlement Agreement, the Debtor agreed not to file an appeal with respect to the abatement for the 2010 tax year, or to seek a tax abatement for the 2011 tax year, and the City agreed to use the valuation of $4,238,100 for the 2011 tax assessment and not to increase such valuation in connection with that tax year. 9. The Debtor now seeks authority to reject the Settlement Agreement so that it may pursue the 2009 Abatement Request and the Appeal, appeal the assessment and subsequent abatement for tax year 2010, and otherwise pursue the 2010 Abatement Request, as well as pursue an abatement request for tax year 2011 (which request the Debtor timely filed with the City and the Board of Assessors on February 28, 2012). III. RELIEF REQUESTED 10. By this Motion, the Debtor seeks authority, under 11 U.S.C. 365(a), to reject the Settlement Agreement. IV. BASIS FOR RELIEF A. The Settlement Agreement Constitutes an Executory Contract 11. Section 365(a) provides, in pertinent part, that the debtor in possession, subject to the court s approval, may assume or reject any executory contract or unexpired lease of the debtor. 11 U.S.C. 365(a). 12. It is well-settled that settlement agreements are a type of contract and are construed according to general principles of contract law. In re Bradlees Stores, Inc., 2001 WL 3
Case: 11-13671-JMD Doc #: 304 Filed: 03/06/12 Desc: Main Document Page 4 of 9 1112308, *5 (S.D.N.Y. Sept. 20, 2001). Accordingly, settlement agreements can constitute executory contracts for the purposes of section 365(a). See id. (finding that settlement agreement was an executory contract for purposes of section 365(a)); see also Jenson v. Continental Financial Corp., 591 F.2d 477, 481-82 (8 th Cir. 1979) (holding that settlement agreement was executory contract subject to rejection under 365(a) because the parties had substantial and material obligations to perform in the future under the terms of the settlement agreement. ); In re High Voltage Engineering Corp., 397 B.R. 579, 598 (Bankr. D. Mass. 2008) (finding that settlement agreement was executory contract); In re W.B. Care Center, LLC, 419 B.R. 62, 70 (Bankr. S.D. Fla. 2009) (finding that because the settlement agreement is a contract on which performance remains due to some extent on both sides, it is an executory contract on both sides. ). 13. Neither the First Circuit nor courts within it apply one specific test for determining whether a contract is executory. See Ready Productions, Inc. v. Jarvis (In re Jarvis), 2005 WL 758805, *2 (Bankr. D.N.H. Mar. 28, 2005) (noting that neither the Countryman material breach test nor the functional analysis test is mandated by the First Circuit, and courts within the First Circuit apply either or both tests). Under the material breach test, an executory contract is a contract under which the obligations of both parties are so under-performed that failure of either party to complete performance would constitute a material breach of the contract. See Stevens v. CSA, Inc., 271 B.R. 410, 413 (D. Mass. 2001) (citing Verne Countryman, Executory Contracts in Bankruptcy; Part I, 57 MINN. L. REV. 439, 460 (1973)). In other words, under the material breach test, courts look to whether the contract has reciprocal obligations continuing into the future. High Voltage Engineering, 397 B.R. at 598. 4
Case: 11-13671-JMD Doc #: 304 Filed: 03/06/12 Desc: Main Document Page 5 of 9 14. Under the functional approach, the court evaluates whether rejection of the contract would benefit the debtor s estate. See id. 15. In this case, the Settlement Agreement is executory under either the material breach or the functional analysis tests. The Settlement Agreement obligates the Debtor to not appeal the 2010 abatement and to not file an abatement request for tax year 2011. The Debtor s pursuit of the Appeal, appeal of the 2010 abatement, and/or its filing of an abatement request for 2011 would constitute a material breach of the Settlement Agreement such that the City would not be required to maintain its assessment at $4,238,100. Similarly, the City is required to use the agreed value in all respects for the 2011 tax year, which tax year is still open procedurally and otherwise. The City s use of a higher value and it may still timely use a higher value of the 2011 tax year-- would constitute a material breach of the Settlement Agreement, excusing the Debtor s performance thereunder. See N.H. Rev. Stat. 75:8 (assessors may adjust assessments for property that has undergone changes to abatements). Accordingly, performance remains due on both sides of the Settlement Agreement. See e.g. W.B. Care Center, LLC, 419 B.R. at 70-72 (settlement agreement was executory where both sides had a continuing obligation not to sue one another). 16. Alternatively, the Settlement Agreement is an executory contract under the functional test. Clearly the Debtor s estate benefits from rejecting the Settlement Agreement; the Settlement Agreement precludes the Debtor from pursuing the 2009 Abatement Request, the Appeal, and the 2010 Abatement Request, or appealing the 2010 abatement, which, if pursued collectively or individually, might result in a lower tax assessment of the Real Property for both tax years. Additionally, the Settlement Agreement arguably precludes the Debtor from filing an abatement application with respect to the 2011 tax year. Reduction of the tax-assessed value of the Real Property to a value more congruous with its actual value would only benefit the estate 5
Case: 11-13671-JMD Doc #: 304 Filed: 03/06/12 Desc: Main Document Page 6 of 9 by lowering the Debtor s tax burden. The Settlement Agreement currently prohibits the Debtor from taking action with respect to the tax-assessed value of the Real Property for years 2009, 2010, and 2011, to the detriment of the Debtor s estate and its creditors, in light of what may be an actual value well below the agreed assessment value. Rejection of the Settlement Agreement will permit the Debtor to exercise all of its rights under section 505 of the Bankruptcy Code to seek a reduction in the tax-assessed value of the Real Property, and the taxes due with respect to the Real Property. 17. Accordingly, the Settlement Agreement constitutes an executory contract subject to rejection under section 365(a). B. Rejection of the Settlement Agreement Will Reopen Tax Years 2009, 2010 and 2011 for the Purposes of Appeal or Abatement Requests; Accordingly, Rejection of the Settlement Agreement is in the Best Interests of the Debtor s Estate 18. Rejection of executory contracts under section 365(a) is routinely granted where... it is in the debtor s interest under the business judgment rule.... In re Delta Air Lines, Inc., 370 B.R. 537, 545 (Bankr. S.D.N.Y. 2007); see also In re Malden Brooks Farm LLC, 435 B.R. 81, 83 (Bankr. D. Mass. 2010) (noting that test for rejection of executory contracts in the First Circuit is the business judgment rule). The business judgment rule accords a debtor s decision to assume or reject an executory contract or unexpired lease the deference mandated by the sound business judgment rule as generally applied by courts to discretionary actions or decisions of corporate directors. Malden Brooks, 435 B.R. at 83 (quoting Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers, Inc.), 756 F.2d 1043, 1046 (4 th Cir. 1985)). The right to reject executory leases and other contracts under Section 365(a) is one of the powerful tools given to debtors-in-possession to facilitate reorganization under the Bankruptcy Code. Delta Air Lines, 370 B.R. at 545. 6
Case: 11-13671-JMD Doc #: 304 Filed: 03/06/12 Desc: Main Document Page 7 of 9 19. Upon rejection, provisions of a contract or settlement agreement which require or could give rise to prospective enforcement are unenforceable. W.B. Care Center, 419 B.R. at 71-72; In re The Ground Round, Inc., 335 B.R. 253, 261 (1 st Cir. BAP 2005). For example, in W.B. Care Center, the court held that a covenant not to sue provision in a settlement agreement involved prospective performance on both sides of the contract because the provision required the parties to continue to not sue each other. 419 B.R. at 72. Therefore, the provision was unenforceable post-rejection because it required prospective performance from the parties. In other words, where a provision in a settlement agreement requires an ongoing promise to do or not do something, such provision in unenforceable post-rejection. As stated in Ground Round, [r]ejection... means that the debtor cannot be compelled to render its performances required under the contract, Ground Round, 335 B.R. at 261. 20. The prospective obligations contained in the Settlement Agreement, consisting of all material obligations of the agreement, will therefore be unenforceable after rejection. Specifically, the provisions of the Settlement Agreement which preclude the Debtor from pursuing the 2009 Abatement Request, the Appeal and the 2010 Abatement Request, appealing the 2010 abatement, or seeking abatement for the 2011 tax year are, post-rejection, unenforceable. 21. Rejection of the Settlement Agreement in this case is thus squarely within the Debtor s sound business judgment. Rejection will permit the Debtor to reopen the 2009 Abatement Request, the Appeal and the 2010 Abatement Request, as well as any appeal of the 2010 abatement, and to pursue an abatement request for 2011, thus permitting the Court to determine the tax liability of the Debtor for each of those tax years under section 505 of the Bankruptcy Code. The Settlement Agreement is also burdensome to the estate. Continued performance under the Settlement Agreement forces the Debtor, its estate, and all of the estate s 7
Case: 11-13671-JMD Doc #: 304 Filed: 03/06/12 Desc: Main Document Page 8 of 9 stakeholders to bear the burden of taxes, secured by first-priority tax liens on the Real Property, based on potentially excessively high tax assessment values. Accordingly, rejection of the Settlement Agreement is warranted and certainly beneficial in this case. 22. A copy of this Motion and the notice of hearing thereon were served on the following parties on the date on which they were filed: (i) the United States Trustee; (ii) the City; (iii) the BTLA; (iv) counsel to the Committee; (v) applicable federal and state taxing authorities; (vi) the Debtor s secured creditors; and (vii) all parties requesting notice. In light of the nature of the relief requested, the Debtor submits that no further notice is required or needed under the circumstances. WHEREFORE, Kingsbury requests that the Court enter an order: (i) authorizing rejection of the Settlement Agreement pursuant to 11 U.S.C. 365(a); and (ii) granting such other and further relief as may be just. 8
Case: 11-13671-JMD Doc #: 304 Filed: 03/06/12 Desc: Main Document Page 9 of 9 Dated: March 6, 2012 KINGSBURY CORPORATION, DONSON GROUP, LTD., and VENTURA INDUSTRIES, LLC By their attorneys: /S/ Jennifer Rood Jennifer Rood, Esq. BERNSTEIN, SHUR, SAWYER & NELSON Jefferson Mill Building 670 North Commercial Street, Suite 108 PO Box 1120 Manchester, NH 03105-1120 (603) 623-8700 and /s/ Robert J. Keach, Esq. Robert J. Keach, Esq. Jessica A. Lewis, Esq. Máire B. Corcoran, Esq. BERNSTEIN, SHUR, SAWYER & NELSON 100 Middle St., PO Box 9729 Portland, Maine 04104-5029 (207) 774-1200 9
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Case: 11-13671-JMD Doc #: 304-4 Filed: 03/06/12 Desc: Notice of Hearing Page 1 of 2 UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW HAMPSHIRE In re: Kingsbury Corporation Donson Group, Ltd. Ventura Industries, LLC Debtors. Bk. No. 11-13671-JMD Bk. No. 11-13700-JMD Bk. No. 11-13687-JMD Jointly Administered NOTICE OF HEARING The United States Bankruptcy Court for the District of New Hampshire (the Bankruptcy Court ) has scheduled a hearing to take place at the Bankruptcy Court, 1000 Elm Street, Manchester, New Hampshire on June 12, 2012 at 9:00 a.m., with respect to the Motion for Authority to Reject Settlement Agreement Between Kingsbury Corporation and City of Keene Pursuant to 11 U.S.C. 365 (the Motion ) filed by Kingsbury Corporation. Your rights may be affected. You should read the Motion carefully and discuss it with your attorney, if you have one in these bankruptcy cases. (If you do not have an attorney, you may wish to consult one.) If you do not want the Bankruptcy Court to approve the relief sought in the Motion, then on or before June 1, 2012, you or your attorney must file with the Bankruptcy Court a response explaining your position. If you are unable to access the CM/ECF Filing System, then your response should be served upon the Bankruptcy Court at: George A. Vannah, Clerk United States Bankruptcy Court 1000 Elm Street, Suite 1001 Manchester, NH 03101 If you do have to mail your response to the Bankruptcy Court for filing, then you must mail it early enough so that the Bankruptcy Court will receive it on or before the date stated above. You may attend the hearing on the Motion to be held at the United States Bankruptcy Court, 1000 Elm Street, Manchester, New Hampshire on June 12, 2012 at 9:00 a.m. If you or your attorney do not take these steps, the Bankruptcy Court may decide that you do not oppose the relief sought in the Motion and may enter an order granting that relief.
Case: 11-13671-JMD Doc #: 304-4 Filed: 03/06/12 Desc: Notice of Hearing Page 2 of 2 Dated: March 6, 2012 KINGSBURY CORPORATION By its attorney: /S/ JENNIFER ROOD, ESQ. Jennifer Rood, Esq. BERNSTEIN, SHUR, SAWYER & NELSON Jefferson Mill Building 670 North Commercial Street, Suite 108 PO Box 1120 Manchester, NH 03105-1120 (603) 623-8700 and /s/ Robert J. Keach, Esq. Robert J. Keach, Esq. Jessica A. Lewis, Esq. Máire B. Corcoran, Esq. BERNSTEIN, SHUR, SAWYER & NELSON 100 Middle St., PO Box 9729 Portland, Maine 04104-5029 (207) 774-1200
Case: 11-13671-JMD Doc #: 304-5 Filed: 03/06/12 Desc: Proposed Order Page 1 of 1 UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW HAMPSHIRE In re: Kingsbury Corporation Donson Group, Ltd. Ventura Industries, LLC Debtors. Bk. No. 11-13671-JMD Bk. No. 11-13700-JMD Bk. No. 11-13687-JMD Jointly Administered ORDER GRANTING MOTION FOR AUTHORITY TO REJECT SETTLEMENT AGREEMENT BETWEEN KINGSBURY CORPORATION AND CITY OF KEENE PURSUANT TO 11 U.S.C. 365 Upon the Motion for Authority to Reject Settlement Agreement Between Kingsbury Corporation and City of Keene Pursuant to 11 U.S.C. 365 (the Motion ), and it appearing that proper and adequate notice has been given and that no other or further notice is necessary, a hearing having been held, and this Court having considered the evidence presented and the arguments of counsel, and reviewed the responses filed to the Motion, if any, and after due deliberation thereon, and good and sufficient cause appearing therefore, it is hereby ORDERED, ADJUDGED, and DECREED that: 1. The Motion is granted. 2. The Debtor, Kingsbury Corporation, is authorized to reject the Settlement Agreement pursuant to 11 U.S.C. 365(a), and the rejection of the Settlement Agreement is hereby approved by the Court. Dated: The Honorable J. Michael Deasy United States Bankruptcy Judge