Document Page 1 of 19 IN THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA In re: RUE21, INC., et al., 1 Debtors. Case No. 17-22045 (GLT) Chapter 11 (Jointly Administered) RUE21, INC., et al., Movants vs. Ref. Docket No. 998 MARK-EDWARDS APPAREL INC., Respondent and Cross-Movant. MARK-EDWARDS APPAREL INC. S (I) RESPONSE TO DEBTORS SECOND OMNIBUS OBJECTION TO CERTAIN PROOFS OF CLAIM (CLAIMS TO BE ADJUSTED) AND (II) CROSS-MOTION FOR ALLOWANCE AND PAYMENT OF ADMINISTRATIVE EXPENSE Mark-Edwards Apparel Inc. ( Mark-Edwards ), by and through its undersigned counsel, hereby (i) responds to the Debtors Second Omnibus Objection to Certain Proofs of Claim (Claims to be Adjusted) [D.I. 998] (the Objection ) as it relates to proof of claim #1519 filed by Mark-Edwards against rue services corporation (the Proof of Claim ), and (ii) to the extent necessary, cross-moves for allowance and payment of an administrative expense pursuant to section 503(b) of the United States Bankruptcy Code, 11 U.S.C. 101-1532 (the Bankruptcy Code ). In support of this Response and Cross-Motion, Mark-Edwards relies on the Declaration 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, are: rue21, inc. (1645); Rhodes Holdco, Inc. (6922); r services llc (9425); and rue services corporation (0396). The location of the Debtors service address is: 800 Commonwealth Drive, Warrendale, Pennsylvania 15086.
Document Page 2 of 19 of Marla Kurtzman attached as Exhibit A hereto (the Kurtzman Declaration ). In further support of this Response and Cross-Motion, Mark-Edwards respectfully states as follows: I. BACKGROUND 1. Mark-Edwards is the largest trade vendor of the above-captioned debtors (the Debtors ) and, as of the date of commencement of these chapter 11 cases (the Petition Date ), was owed $23,246,793.62 for goods and apparel sold to the Debtors pursuant to various prepetition purchase orders (the Purchase Orders ). The Proof of Claim provided a summary of the invoices underlying this claim. The Proof of Claim also identified a subset of these invoices, totaling $5,293,565.15, for which it believed the goods were delivered within twenty days prior to the Petition Date. Accordingly, the Proof of Claim asserted (i) an administrative expense pursuant to section 503(b)(9) of the Bankruptcy Code in the amount of $5,293,565.15, and (ii) a general unsecured claim in the amount of $17,953,228.47. 2. Following the filing of its Proof of Claim, Mark-Edwards provided the Debtors certain documentation requested by the Debtors in support of the Proof of Claim. On August 24, 2017, the Debtors provided Mark-Edwards with a reconciliation showing a 503(b)(9) amount of only $4,232,152.83 (the Reconciliation ). 2 The main difference between the Debtors calculation and Mark-Edwards calculation was that the Debtors calculation omitted certain invoices totaling $1,223,422.50 because, according to the Debtors, the deliveries on those invoices were made post-petition between May 15 and 22, 2017. 3 A summary of Mark 2 A true and accurate copy of the Reconciliation is attached as Exhibit 1 to the Kurtzman Declaration. 3 The Debtors calculation also included four invoices totaling $162,010.18 that had not been included on the 503(b)(9) schedule to the Proof of Claim, but for which the Debtors show receipt of goods during the twenty days prior to the Petition Date, on April 25, 2017. Specifically: #745508 in the amount of $59,964.00, #748509 in the amount of $47,241.60, #748510 in the amount of $60,933.60, and #748511 in the amount of $17,280.00. 2
Document Page 3 of 19 Edwards invoices for which the Debtors assert deliveries were made post-petition is attached as Exhibit 2 to the Kurtzman Declaration. 4 3. The Debtors filed their Objection on August 28, 2017. The Objection does not dispute the amount or validity of Mark-Edwards claims as such. Rather, it seeks to reduce the administrative priority amount to $4,232,152.83 (with a corresponding increase in the general unsecured claim amount), for the reason Not 503(b)(9) 20+ days as set forth in Schedule 1 of the Objection (at page 3 of 5). II. RESPONSE TO OBJECTION 4. As worded, the basis of the Objection is that the goods at issue were delivered 20+ days prepetition. But as the Debtors Reconciliation shows, the Debtors themselves acknowledge this is not the case, and that the goods at issue were in fact delivered post-petition. The Debtors Objection appears to be premised on the highly technical argument that postpetition delivery of goods makes a claim ineligible for priority under section 503(b)(9) of the Bankruptcy Code. But this argument proves too much. As Debtors lead counsel regularly acknowledge in form first-day motions filed in other cases in the Third Circuit (and elsewhere) for entry of orders confirming administrative expense status for orders outstanding as of the petition date, goods delivered after the Petition Date are afforded administrative expense priority under section 503(b) of the Bankruptcy Code. E.g., Debtors Motion for Entry of Interim and Final Orders (I) Authorizing the Payment of (A) Working Interest Expenses, (B) Joint Interest Billings, (C) Marketing Expenses, and (D) 503(b)(9) Claims, (II) Confirming 4 The invoices on Exhibit A also include four invoices totaling $48,664 that Mark-Edwards had believed were delivered more than twenty days prior to the Petition Date, but for which the Debtors show receipt of goods on May 15, 2017. Specifically: #748573 in the amount of $12,328, #748759 in the amount of $2,960.00, #748760 in the amount of $10,375, and #748761 in the amount of $23,001. 3
Document Page 4 of 19 Administrative Expense Priority of Outstanding Orders, and (III) Granting Related Relief, In re Emerald Oil, Inc., et al., Case No. 16-10704 [D.I. 10], 29 (Bankr. D. Del. Mar. 22, 2016). 5 Accordingly, and for the reasons set forth more fully below in Mark-Edwards Cross-Motion, the Objection should be overruled. III. CROSS-MOTION A. Relief Requested 5. By its Cross-Motion, Mark-Edwards respectfully requests entry of an order, substantially in the form of the proposed order attached as Exhibit B hereto, (i) overruling the Objection as to the Proof of Claim; (ii) allowing the Proof of Claim in the amount of (A) $17,791,218.29 as a general unsecured claim and (B) $5,455,575.33 as an administrative expense pursuant to section 503(b) of the Bankruptcy Code (the Administrative Expense Claim ); (iii) directing immediate payment of the Administrative Expense Claim; and (iv) awarding Mark-Edwards such other and further relief as is just and proper. B. Jurisdiction and Venue 6. This Court has jurisdiction over Mark-Edwards Cross-Motion pursuant to 28 U.S.C. 1334 and 157(b), and the Order of Reference of Bankruptcy Cases and Proceedings 5 See also, e.g., Debtors Motion Seeking Entry of Interim and Final Orders (A) Authorizing the Debtors to Pay Certain Prepetition Claims of (I) Critical Vendors, and (II) Carrier, Warehousemen, and Section 503(b)(9) Claims and (B) Granting Related Relief, In re Avaya, Inc., et al., Case No. 17-10089 [D.I. 5], 33 (Bankr. S.D.N.Y. Jan. 19, 2017); Debtors Motion for Entry of Interim and Final Orders (I) Authorizing the Payment of (A) Working Interest Expenses, (B) Joint Interest Billings, (C) Marketing Expenses, and (D) 503(b)(9) Claims, (II) Confirming Administrative Expense Priority of Outstanding Orders, and (III) Granting Related Relief, In re Samson Resources Corp., et al., Case No. 15-11934 [D.I. 6], 34 (Bankr. D. Del. Sept. 17, 2015); Debtors Motion for Entry of Interim and Final Orders Authorizing Payment of (I) Operating Expenses, (II) Joint Interest Billings, (III) Shipper and Warehousemen Claims, and (IV) Section 503(b)(9) Claims, In re Sabine Oil & Gas Corp., et al., Case No. 15-11835 [D.I. 12], 28 (Bankr. S.D.N.Y. July 15, 2015). 4
Document Page 5 of 19 Nunc Pro Tunc dated October 16, 1984, from the United States District Court for the Western District of Pennsylvania. This is a core proceeding pursuant to 28 U.S.C. 157(b), and the Court may enter a final order consistent with Article III of the United States Constitution. Mark- Edwards hereby confirms its consent, pursuant to Rule 7008 of the Federal Rules of Bankruptcy Procedure, to the entry of a final order by this Court in connection with the Cross-Motion if it is later determined that the Court, absent consent of the parties, cannot enter final orders or judgments in connection herewith consistent with Article III of the United States Constitution. 7. Venue of the Cross-Motion in this district is proper pursuant to 28 U.S.C. 1408 and 1409. 8. The statutory predicate for the relief requested in the Cross-Motion is section 503(b) of the Bankruptcy Code. C. Basis for Relief Requested 9. Section 503(b) of the Bankruptcy Code provides, in pertinent part, that there shall be allowed[] administrative expenses,... including the actual, necessary costs and expenses of preserving the estate.... 11 U.S.C. 503(b)(l)(A). In the Third Circuit, as elsewhere, the actual, necessary costs and expenses of preserving the estate include claims aris[ing] from a transaction with the debtor-in-possession where the consideration supporting the claimant s right to payment [is] beneficial to the debtor-in-possession in the operation of the business. In re Calpine Corp. v. O'Brien Envt'l Energy, Inc. (In re O'Brien Envt'l Energy, Inc.), 181 F.3d 527, 532-33 (3d Cir. 1999). The claimant under section 503(b)(l)(A) bears the burden of establishing the requisite transaction with the estate and benefit to the estate by a preponderance of the evidence. See In re ID Liquidation One, LLC, 503 B.R. 392, 399 (Bankr. D. Del. 2013). 5
Document Page 6 of 19 10. A debtor's acceptance of a non-debtor party's post-petition performance under an executory contract satisfies the transaction-with-the-estate requirement for administrative expense priority. See id. (noting courts have consistently held that administrative expense priority is available to contract parties when the debtor enjoys the benefits of the contract pending assumption or rejection, and citing cases); In re John Clay & Co., 43 B.R. 797, 812 (Bankr. D. Utah 1984) (affording administrative priority for livestock delivered post-petition pursuant to prepetition purchase orders); In re Ridgewood Sacramento, Inc., 20 B.R. 443, 446 (Bankr. E.D. Cal. 1982) (same, for goods delivered to debtor s designee post-petition). 11. The benefit to the estate is measured by the reasonable value of the goods or services provided by the non-debtor. See ID Liquidation One, 503 B.R. at 399 (internal quotation marks, citation omitted). And where there is a contract, there is a presumption that the contract terms and rate represent the reasonable value of the goods or services for purposes of the section 503(b)(1) analysis. See id.; In re Smurfit-Stone Container Corp., 425 B.R. 735, 741 (Bankr. D. Del. 2010). 12. Here, the Debtors concede that they received goods from Mark-Edwards postpetition under Purchase Orders that were executory as of the Petition Date, and that the amount invoiced was consistent with the applicable Purchase Orders (or else the Debtors would have also objected to the Proof of Claim on that basis). And on information and belief, the goods delivered post-petition were in fact used by the Debtors in the conduct of their business. Accordingly, the elements for allowance of an administrative expense on account of the invoices identified in Exhibit A hereto are (or will be) satisfied, and the Court should allow Mark- Edwards an administrative expense in the amount of $1,223,422.50 on account of goods 6
Document Page 7 of 19 delivered post-petition, in addition to the $4,232,158.83 the Debtors acknowledge is entitled to administrative expense status pursuant to section 503(b)(9) of the Bankruptcy Code. 13. The Court should also order immediate payment of the Administrative Expense Claim because the effective date of the Debtors chapter 11 plan, which is the date upon which payment is due pursuant to section 1129(a)(9)(A) of the Bankruptcy Code, has already occurred. IV. RESERVATION OF RIGHTS 14. Mark-Edwards reserves the right to amend, modify, or supplement this Response and Cross-Motion prior to the hearing thereon, and to assert any additional administrative expense claims prior to the administrative bar date. V. NOTICE 15. Mark-Edwards will provide notice of this Response and Cross-Motion to: (a) counsel to the Debtors, (b) the Office of the United States Trustee for the Western District of Pennsylcania, and (c) any party that has requested notice pursuant to Bankruptcy Rule 2002. Mark-Edwards submits that, in light of the nature of the relief requested, no other or further notice need be given. [Remainder of page intentionally left blank.] 7
Document Page 8 of 19 VI. CONCLUSION WHEREFORE, Mark-Edwards respectfully requests that the Court enter an order, substantially in the form of the proposed order attached as Exhibit B hereto, (i) overruling the Objection as to the Proof of Claim; (ii) allowing the Proof of Claim in the amount of (A) $17,791,218.29 as a general unsecured claim and (B) $5,455,575.33 as an administrative expense pursuant to section 503(b) of the Bankruptcy Code; (iii) directing immediate payment of the Administrative Expense Claim; and (iv) awarding Mark-Edwards such other and further relief as is just and proper. Dated: October 2, 2017 Respectfully submitted, DRINKER BIDDLE & REATH LLP /s/ Marita S. Erbeck Marita S. Erbeck 600 Campus Dr. Florham Park, New Jersey 07932-1047 Telephone: (973) 549-7000 Facsimile: (973) 360-9831 marita.erbeck@dbr.com Counsel for Mark-Edwards Apparel Inc. 8
Document Page 9 of 19 EXHIBIT A Kurtzman Declaration
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Document Page 16 of 19 EXHIBIT B Proposed Order
Document Page 17 of 19 IN THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA In re: RUE21, INC., et al., 1 Debtors. Case No. 17-22045 (GLT) Chapter 11 (Jointly Administered) RUE21, INC., et al., Movants vs. Ref. Docket No. MARK-EDWARDS APPAREL INC., Respondent and Cross-Movant. ORDER (I) OVERRULING IN PART THE DEBTORS SECOND OMNIBUS OBJECTION TO CERTAIN PROOFS OF CLAIM (CLAIMS TO BE ADJUSTED) AND (II) GRANTING CROSS-MOTION OF MARK-EDWARDS APPAREL INC. FOR ALLOWANCE AND PAYMENT OF ADMINISTRATIVE EXPENSE Upon the response and cross-motion (the Cross-Motion ) 2 of Mark-Edwards Apparel Inc., for entry of an order (i) overruling the Debtors Second Omnibus Objection to Certain Proofs of Claim (Claims to be Adjusted) [D.I. 998] as to the Proof of Claim filed by Mark- Edwards, and (ii) allowing an administrative expense to Mark-Edwards pursuant to section 503(b) of the Bankruptcy Code, all as more fully set forth in the Motion; and this Court having 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, are: rue21, inc. (1645); Rhodes Holdco, Inc. (6922); r services llc (9425); and rue services corporation (0396). The location of the Debtors service address is: 800 Commonwealth Drive, Warrendale, Pennsylvania 15086. 2 Capitalized terms not otherwise defined herein have the meanings ascribed to them in the Cross-Motion.
Document Page 18 of 19 jurisdiction over this matter pursuant to 28 U.S.C. 1334 and 157(b), and the Order of Reference of Bankruptcy Cases and Proceedings Nunc Pro Tunc dated October 16, 1984, from the United States District Court for the Western District of Pennsylvania; and this Court having found that this is a core proceeding pursuant to 28 U.S.C. 157(b), and that it may enter a final order consistent with Article III of the United States Constitution; and this Court having found that venue of this proceeding in this district is proper pursuant to 28 U.S.C. 1408 and 1409; and this Court having found that Mark-Edwards notice of the Cross-Motion and opportunity for a hearing thereon were appropriate under the circumstances and that no other notice need be provided; and this Court having reviewed the Cross-Motion and heard the statements in support of the relief requested therein at a hearing before this Court (the Hearing ); and this Court having determined that the legal and factual bases set forth in the Cross-Motion and at the Hearing establish just cause for the relief granted herein; and upon all of the proceedings before this Court; and after due deliberation and sufficient cause appearing therefor, it is HEREBY ORDERED THAT: 6. The Cross-Motion is granted as set forth herein. 7. The Objection is hereby overruled as to proof of claim #1519 filed by Mark- Edwards against rue services corporation (the Proof of Claim ). 8. The Proof of Claim is hereby allowed (i) as a general unsecured claim in the amount of $17,791,218.29, and (ii) as an administrative expense pursuant to section 503(b) of the Bankruptcy Code in the amount of $5,455,575.33 (the Allowed Administrative Claim Amount ). 9. The Debtors shall pay the Allowed Administrative Claim Amount to Mark- Edwards within five business days following entry of this Order. 2
Document Page 19 of 19 10. This Court retains jurisdiction with respect to all matters arising from or related to the implementation, interpretation, and enforcement of this Order. Prepared by: Drinker Biddle & Reath LLP (counsel to Mark-Edwards) Pittsburgh, Pennsylvania Dated: October, 2017 THE HONORABLE GREGORY L. TADDONIO UNITED STATES BANKRUPTCY JUDGE 3