The United States Bankruptcy Court for the District of Delaware granted a motion last year compelling a vendor to disgorge a $1.25 million payment it had received under critical vendor orders. However, the seemingly harsh edict In Re Meridian Automotive Systems—Composites Operations, Inc., et al., 372 B. R. 710 (Banker D. Del 2007) was particularly fact driven.
Meridian Automotive Systems, Inc. ("Meridian") and Plastech Engineered Products, Inc. ("Plastech") were automotive suppliers to Ford Motor Company. Meridian supplied tier 1 bumper systems for the Ford Expedition. Meridian was required to utilize a tier 2 supplier, Plastech, to produce the bumper system for the 2002-2006 Expedition model years.
On April 26, 2005, Meridian filed a motion seeking an order authorizing payment of pre-petition claims of critical vendors. The order was granted first on an interim basis and subsequently by final order (collectively, the "Critical Vendor Orders"). The Critical Vendor Orders specifically provided that if a critical vendor subsequently refused to provide goods to Meridian on customary trade terms, the critical vendor would be required to disgorge any payment received in excess of the post-petition obligations owed to the critical vendor at that time.
On June 1, 2005, Meridian and Plastech entered into a trade agreement pursuant to the Critical Vender Orders and pursuant to which Meridian paid Plastech $1.25 million of its pre-petition claim ("Trade Payment"), and Plastech agreed to continue supplying to Meridian. In January 2006, Plastech advised Meridian that it would not supply certain service parts once the model year production concluded in June 2006.
Meridian advised Plastech that it was required to produce service parts pursuant to the trade agreement for 10 years after production of the current model ceased at prices specified in applicable purchase orders or leases. Later, in May, the parties met and Plastech reconsidered its position and confirmed that it would provide the parts.
In July of 2006, Plastech twice advised Meridian that it would require a price increase for its parts, and that it would refuse to ship the parts until it received a price increase. Meridian did not pay the price increase and Plastech failed to ship the parts to Meridian during the months of July and August 2006. Meridian advised Plastech by letter dated Sept. 5, 2006, that its refusal to provide the service parts to Meridian pursuant to the terms of their agreement was a breach and as a result, Plastech was obligated to immediately return the Trade Payment to Meridian.
Shortly thereafter, Plastech resumed supplying parts to Meridian and again confirmed its contractual obligation to do so in writing. Plastech began to fall behind in its delivery schedule between September and December 2006, and failed to fully perform its obligations. Meridian continually complained to Plastech and demanded that it comply with its performance requirements on a timely basis, and advised Plastech that it would pursue its legal rights if it did not perform.
On Dec. 13, 2006, Plastech advised Meridian that it would agree to transfer all of the tooling necessary to manufacture the bumpers to Meridian. Plastech did in fact transfer the tooling materials, and the trade agreement was mutually terminated Dec. 22, 2006.
During this same time period, on Dec. 6, 2006, the court confirmed Meridian's fourth amended joint plan of reorganization that became effective December 29, 2006. Pursuant to the plan, Meridian assumed all of its executory contracts or unexpired leases as of the effective date, unless they were previously assumed, rejected, terminated, or expired. In the plan, Meridian also reserved causes of action it had against vendors, and specifically included Plastech.
On Jan. 19, 2007, Meridian made a demand on Plastech that it immediately repay the Trade Payment because of its breaches of the trade agreement. When Plastech refused to return the Trade Payment, Meridian filed a motion seeking disgorgement of the $1.25 million payment Plastech had received under the Critical Vendor Orders.
Breach of Contract
Plastech argued that it did not breach the terms of the trade agreement, but rather, that Meridian failed to provide the required notice of default to terminate the trade agreement, and thus waived any default by Plastech. Pastech further argued that the recoupement of the Trade Payment was precluded by confirmation of the plan.
The court found that Plastech's demands for price increases were a direct violation of the trade agreement and the Critical Vendor Orders, which required that during the course of the bankruptcy case Plastech provide Meridian with product at the same prices that had been in effect for 120 days prior to the petition date. The court further found that Plastech's refusal to ship product for two months, when Meridian rejected the requested price increases, was a further breach of contract.
Termination of Trade Agreement
Plastech argued further that Meridian was not entitled to repayment of the Trade Payment because it was required to terminate the trade agreement before it could recover the payment. The Critical Vendor Orders provided two instances under which the payment would have to be returned (where its participation is terminated on notice from Meridian, or where it refuses to supply goods in accordance with the party's customary trade terms).
The court opined that the Sept. 5, 2006 letter provided Plastech with notice of its defaults and that was sufficient notice of termination.
Plastech also argued that because the agreement was terminated consensually, the termination was ineffective to require disgorgement.
The court rejected this argument out of hand, finding no evidenced in the agreements to support Plastech's argument.
This article is presented for informational purposes only and is not intended to constitute legal advice.
