IN THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA ********************************************************************* IN RE: Case No 06-70148 BM W.S. LEE & SONS, INC., Debtor. * * * * * * * * * * * * * * * * IN RE: LEE SYSTEMS SOLUTIONS, LLC, Debtor. * * * * * * * * * * * * * * * * IN RE: W.S. LEE & SONS, INC., AND LEE SYSTEMS SOLUTIONS, LLC Movants/ Debtors-in- Possession Chapter 11 Case No 06-70148 BM Chapter 11 Document No. Response Date: Hearing Date: v. COMMONWEALTH OF PENNSYLVANIA, DEPARTMENT OF GENERAL SERVICES, Respondent CONSENT MOTION FOR ENTRY OF AN ORDER AUTHORIZING REJECTION OF EXECUTORY CONTRACT PURSUANT TO 11 U.S.C 365 AND APPROVING SETTLEMENT AND RELEASE AGREEMENT AND NOW, COME W.S. Lee & Sons, Inc. and Lee Systems Solutions, LLC, debtors-in-possession (the Debtors ), and the Commonwealth of Pennsylvania Department of General Services (the DGS ), by and through their respective undersigned counsel, and together set forth this Consent Motion for Entry of an Order Authorizing Rejection of Executory Contract Pursuant to 11 U.S.C. 365 and Approving Settlement and Release Agreement (the Motion ), and in support thereof state as follows:
Introduction 1. On or about January 28, 2005, the DGS and W.S. Lee entered into a contract titled Contract For The Supply And Delivery Of Perishable And Non-Perishable Food (together with all Exhibits thereto, the Contract ). 2. The Contract essentially sets forth the terms and conditions pursuant to which, inter alia, the DGS is to procure and W.S. Lee & Sons, Inc. ( W.S. Lee ) is to supply perishable and non-perishable food items to various agencies of the Commonwealth. 3. On March 14, 2006 (the Petition Date ), W.S. Lee 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 Western District of Pennsylvania (the Bankruptcy Court ). 4. Also on the Petition Date, Lee Systems Solutions, LLC ( Lee Systems ) filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. 5. As of the date hereof the Bankruptcy Court has not entered an order consolidating the bankruptcy cases (collectively, the Chapter 11 Cases ) for administrative or substantive purposes. 6. No trustee or examiner has been appointed in the Bankruptcy Case. 7. The Parties have undertaken a dialogue relative to whether W.S. Lee will assume or reject the Contract, an executory contract for purposes of Bankruptcy Code section 365, as well as their respective potential claims against each other arising out of said contractual relationship.. 2
8. The Parties have been unable to reach mutually agreeable terms relative to the assumption of the Contract, and have agreed it would be in the best interests of the Debtors and the DGS that the Contract be rejected pursuant to the terms and conditions of a settlement and release agreement (the Settlement Agreement ), a copy of which has been attached hereto as Exhibit A. Jurisdiction 9. Pursuant to 28 U.S.C. 1134, the Court has jurisdiction over this Motion, which is a core proceeding within the meaning of 28 U.S.C. 157(b)(2). Venue is proper pursuant to 28 U.S.C. 1408 and 1409. The statutory predicates for the relief requested herein are 365 of the Bankruptcy Code and Rule 9019 of the Bankruptcy Rules. Relief Requested 10.Section 365(a) of the Bankruptcy Code provides that a debtor in possession subject to the Court s approval, may assume or reject any executory contract or unexpired lease of the debtor. This section permits a debtor to assume or reject executory contracts upon a showing that the debtor s decision to take such action will benefit the debtor s estate and is an exercise of sound business judgment. In re Market Square Inn, Inc., 978 F.2d 116, 121 (3d Cir. 1992) ( The resolution of this issue of assumption or rejection will be a matter of business judgment by the bankruptcy court ). 11. The business judgment rule requires that a debtor demonstrate only that the rejection of the lease or contract in question will likely benefit the estate. In re Wheeling-Pittsburgh Steel Corp., 59 B.R. 129 (Bankr. W.D.Pa. 1986). Courts generally will not second guess a debtor s business judgment concerning the assumption or rejection of an 3
unexpired lease or executory contract. e.g., Sharon Steel Corp. v. National Fuel Gas Distrib. Corp. (In re Sharon Steel Corp.), 872 F.2d 36 (3d Cir. 1989). The business judgment test is not a strict standard and therefore, absent a finding of bad faith, Courts should not disturb the debtor s decision to reject. In re Hardie, 100 B.R. 284, 287 (Bankr. E.D.N.C. 1989); In re Bildisco, 682 F.2d 72, 70 (3d Cir. 1982), aff d sub nom, NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984). 12. The Parties hereby seek entry of an Order of Court authorizing the rejection of the Contract, upon the terms set forth in the Settlement Agreement, which are incorporated herein. 13. W.S. Lee is unable and unwilling to assume the Contract without the DGS s consent to various requested concessions and changes to which the DGS is unable and/or unwilling to consent. 14. The Parties have agreed to a consensual rejection/termination of the Contract, subject to this Court s entry of an Order approving the terms of the Settlement Agreement, which include, as the result of the various releases, the agreement of DGS that is shall not assert claims for setoff or recoupment against the sums owed to W.S. Lee for goods supplied and delivered pursuant to the Contract, and further, which provides that DGS shall not have and shall not assert any claim(s) for rejection damages. Agreement: 15. The following are the essential terms of the Settlement (a) From the date of the Settlement Agreement through and including April 28, 2006, the Parties shall perform their respective duties under the terms of the Contract; provided, however, that the DGS may, at its option, procure directly from Liberty Foods, Inc. any produce products that the DGS would be bound to procure under the terms of the Contract through W.S. Lee, but for this Settlement Agreement; 4
(b) With respect to (i) any inventory that Lee currently holds and that has been earmarked for the benefit of various corrections facilities to be served under the terms of the Contract (the Corrections Inventory ), as such inventory may be (a) adjusted downwards as the result of additional deliveries to such correction facilities between the date hereof and April 28, 2006, and/or (b) adjusted upwards as the result of additional purchases of inventory that may be required to fill any order placed between the date hereof and April 28, 2006, and (ii) any inventory other than the Corrections Inventory (the Non-Corrections Inventory ), the Parties shall cooperate in an effort to reach a meeting of minds whereby the DGS, or one of the other agencies of the Commonwealth of Pennsylvania (each an Agency ) may agree (x) to purchase all of such Corrections Inventory and Non-Corrections Inventory that, as of April 28, 2006, remains in W.S. Lee s possession, is useable, has not reached its expiration date, and has reasonably sufficient shelf life remaining(the Remaining Inventory ); (y) to purchase the Remaining Inventory on or before a date certain; and (z) to purchase the Remaining Inventory at the price or prices as set forth under the terms of the Contract (the Contract Prices ) or at some other price or prices as the Parties may otherwise agree. (c) From and after the date of the Settlement Agreement, any default or event of default under the Contract that occurred on or prior to such date, shall be deemed waived except as expressly provided otherwise herein, and the DGS thereby waives, with prejudice, any and all setoff and recoupment rights it may have otherwise been able to assert; (d) The Parties agreed to a mutual release; (e) DGS shall pay to W.S. Lee without setoff or recoupment the amounts due it as of the date of the commencement of the case as well as such amounts as become due as the result of post-petition supplying and delivery of goods, again, without setoff or recoupment; and (f) DGS shall not have or assert any claim(s) for rejection/termination of the said contract. 16. The Contract set forth above herein is not necessary for the reorganization of the Debtors affairs. Accordingly, its rejection is in the best interests of the Debtors estates. WHEREFORE, the Debtors respectfully requests that this Honorable Court enter the attached proposed Order authorizing the Debtor to reject the Contract, approving the terms of the settlement agreement 5
and release attached to the Contract as Exhibit A, and granting such other appropriate relief as the Court may deem appropriate. Dated: Pittsburgh, Pennsylvania April 28, 2006 Respectfully submitted, CAMPBELL & LEVINE, LLC By: /s/ronald B. Roteman Ronald B. Roteman, Esquire PA ID No. 66809 1700 Grant Building Pittsburgh, PA 15219 (412) 261-0310 Attorneys For Commonwealth of Pennsylvania, Department of General Services SPENCE, CUSTER, SAYLOR, WOLFE & ROSE, L.L.C. By: /s/ James R. Walsh 400 AmeriServ Bldg. P.O. Box 280 Johnstown, Pa., 15907 (814)536-0735 Pa. I.D. # 27901 Jwalsh@spencecuster.com Attorneys For Debtors-In- Possession 6