Full title: Motion (A) to Enforce Asset Purchase Agreement and Sale Order; and (B) for Allowance of Administrative, Rejection Damages, and other Claims Filed by Interested Party Destination Pet, LLC (Attachments: # 1 Exhibit A # 2 Exhibit B # 3 Exhibit C # 4 Exhibit D # 5 Exhibit E # 6 Exhibit F # 7 Proposed Order) (English, Eric) (Entered: 02/12/2021)
Document posted on Feb 11, 2021 in the bankruptcy, 31 pages and 0 tables.
Bankrupt11 Summary (Automatically Generated)
4 Order Regarding Destination Pet, LLC’s Motion to Enforce Sale Order and Asset Purchase Agreement and to Compel Transfer of Certain Books and Records and Agreed Protective Order between the Debtors and Destination Pet, LLC [Docket No. 328] and Order Granting Destination Pet, LLC’s Second Emergency Motion to Enforce Sale Order and Asset Purchase Agreement [Docket No. 386].
7 Destination Pet’s Proof of Claim for these rejection damages is attached hereto as Exhibit A.
agreement, the parties have worked to allocate medical expense claims incurred prior to March 27, 2020 that were reported thereafter and have been paid by Destination Pet, and an estimate of claims incurred prior to closing that will be reported in the future and paid by Destination Pet.As a condition to fulfilling payment of claims, Cigna demanded Destination Pet pay the Termination Fee, which Destination Pet paid.In order to avoid the delay of processing employees onto Destination Pet’s payroll system, the Debtors offered to let Destination Pet use their Paycom payroll processing system until Destination Pet was ready to switch employees to its own Paylocity payroll processing system.In sum, Destination Pet paid amounts that were the Debtors’ obligations pursuant to the APA, Transition Services Agreement and other amounts that must be reimbursed as either payment of prepetition claims or payment of postpetition claims for which Destination Pet is entitled to payment as an administrative claim under section 503(b) or as a substantial contribution claim.
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF TEXAS
In re: Chapter 11
VETERINARY CARE, INC., Case No. 19-35736
D/B/A VITALPET, et al.,
DESTINATION PET, LLC’S MOTION (A) TO ENFORCE ASSET PURCHASE AGREEMENT AND SALE ORDER; AND (B) FOR ALLOWANCE OF
ADMINISTRATIVE, REJECTION DAMAGES, AND OTHER CLAIMS
THIS MOTION SEEKS AN ORDER THAT MAY ADVERSELY AFFECT YOU. IF YOU OPPOSE THE MOTION, YOU SHOULD IMMEDIATELY CONTACT THE MOVING PARTY TO RESOLVE THE DISPUTE. IF YOU AND THE MOVING PARTY CANNOT AGREE, YOU MUST FILE A RESPONSE AND SEND A COPY TO THE MOVING PARTY.
PURSUANT TO THE DEBTORS’ PLAN, YOU MUST FILE AND SERVE YOUR RESPONSE WITHIN 30 DAYS OF THE DATE THIS MOTION WAS SERVED ON YOU. YOUR RESPONSE MUST STATE WHY THE MOTION SHOULD NOT BE GRANTED. IF YOU DO NOT FILE A TIMELY RESPONSE, THE RELIEF MAY BE GRANTED WITHOUT FURTHER NOTICE TO YOU. IF YOU OPPOSE THE MOTION AND HAVE NOT REACHED AN AGREEMENT, YOU MUST ATTEND THE HEARING. UNLESS THE PARTIES AGREE OTHERWISE, THE COURT MAY CONSIDER EVIDENCE AT THE HEARING AND MAY DECIDE THE MOTION AT THE HEARING.
REPRESENTED PARTIES SHOULD ACT THROUGH THEIR ATTORNEY.
Destination Pet, LLC and its wholly owned subsidiary VP Integration, LLC (collectively, “Destination Pet”) file this motion (the “Motion”)2 to enforce the Asset Purchase Agreement and the Sale Order (as defined below) and for Allowance of Administrative Claims, Rejection Damages Claims and Other Claims, and respectfully show as follows:
1 The debtors in these chapter 11 cases (the “Bankruptcy Cases”), along with the last four digits of each Debtor’s federal tax identification number, as applicable, are: Veterinary Care, Inc. (3844) (“VCI”) and TVET Management LLC (1790) (“Management,” and collectively with VCI, the “Debtors”). The Debtors’ mailing address is 2700 Post Oak Blvd., 21st Floor, Houston, Texas 77056.
2 Capitalized terms used but not otherwise defined herein have the meanings ascribed to them in the Sale Order or the APA, as applicable.
1. Destination Pet seeks payment of its remaining claims, including administrative and rejection damages claims, and amounts due under the APA and Sale Order. Destination Pet purchased substantially all of the Debtors’ assets for an amended cash purchase price of $45,000,000, thereby providing the funds necessary to make this case a success. Destination Pet then closed the sale transaction notwithstanding the uncertainty surrounding the early days of COVID-19.
2. Beginning shortly after closing, Destination Pet faced unexpected and unnecessary challenges from the Debtors. Among the challenges faced by Destination Pet was the Debtors’ unsupported interpretation of several provisions of the APA that required Destination Pet to file two separate motions to enforce the APA and Sale Order.3 Despite prevailing on both motions,4Destination Pet expended substantial time and legal fees to address the Debtors’ actions and vindicate its position.
3. Destination Pet faced additional issues, many of which were typical post-closing matters of the type that are usually resolved by good faith discussions between a buyer and seller.
More often than not, however, the Debtors did not agree to resolve those matters, and in some cases, they ignored Destination Pet’s communications entirely.5 Nonetheless, Destination Pet continued to work with the Debtors to resolve issues for the mutual benefit of both parties.
3 See Destination Pet, LLC’s Emergency Motion to Enforce Sale Order and Asset Purchase Agreement and to Compel Transfer of Certain Books and Records [Docket No. 303] and Destination Pet, LLC’s Second Emergency Motion to Enforce Sale Order and Asset Purchase Agreement [Docket No. 353].
4 Order Regarding Destination Pet, LLC’s Motion to Enforce Sale Order and Asset Purchase Agreement and to Compel Transfer of Certain Books and Records and Agreed Protective Order between the Debtors and Destination Pet, LLC [Docket No. 328] and Order Granting Destination Pet, LLC’s Second Emergency Motion to Enforce Sale Order and Asset Purchase Agreement [Docket No. 386].
5 On October 13, 2020, Destination Pet sent the Debtors a letter identifying issues related to the Cigna Agreement (as defined below) and proposing resolutions to certain claims. However, the Debtors failed to respond to the letter or
4. The remaining issues that Destination Pet was not able to resolve are described below and Destination Pet seeks an order from this Court requiring the Liquidating Trustee to pay them.
Cigna security deposit. Pursuant to the APA, Destination Pet purchased contract security deposits. Destination Pet understood that Cigna returned a contract security deposit to the Debtors in the amount of $70,741.00 (the “Security Deposit”) under the Cigna Agreement (as defined below). The Liquidating Trustee has taken the position that such deposit was not received by the Debtors. To the extent the Debtors or the Liquidating Trustee receive such deposit, it should be transferred to Destination Pet under the terms of the APA. If not, the Liquidating Trustee should be ordered to cooperate with Destination Pet’s reasonable requests to obtain the deposit from Cigna.6
Cigna termination fee paid by Destination Pet. Destination Pet paid a Termination Fee (as defined below) to Cigna in the amount of $73,869.46. As the subrogee of Cigna, Destination Pet asserts this claim against the Liquidating Trustee as a rejection damages claim resulting from the rejection of the Cigna contracts under the Plan.7 Cigna claims allocation. Pursuant to the APA and the amendments thereto, Destination Pet and the Debtors agreed that Destination Pet would only be responsible for obligations, including medical expense claims, incurred after closing on March 27, 2020. Based on that Destination Pet’s follow-up email; instead, the Debtors simply ignored such communication from Destination Pet.
The Debtors also repeatedly ignored Destination Pet’s efforts to obtain a common interest agreement in connection with negotiating and resolving tax matters for the Debtors.
6 As discussed herein, Destination Pet has engaged in discussions with the Liquidating Trustee regarding these issues.
It is expected that an agreement can be reached regarding the Cigna deposit and other issues. However, given that the negotiations did not produce a comprehensive resolution, Destination Pet presents each of its claims herein.
7 Destination Pet’s Proof of Claim for these rejection damages is attached hereto as Exhibit A.
agreement, the parties have worked to allocate medical expense claims incurred prior to March 27, 2020 that were reported thereafter and have been paid by Destination Pet, and an estimate of claims incurred prior to closing that will be reported in the future and paid by Destination Pet. Based on this allocation, the Debtors’ obligation to Destination Pet for the Cigna claims totals $67,752.76. Destination Pet intends to establish an agreement by the parties on this amount, or in the alternative, that such amount is appropriate based on its detailed calculations.
Substantial Contribution Claim for Tax Related Work. In an example of cooperation between the parties, Destination Pet coordinated with the Debtors to successfully negotiate a resolution to the a tax audit by the New York State Department of Taxation and Finance (“New York Taxing Authority”) and resolve issues related to unpaid unemployment insurance taxes owed to the State of Arkansas. Originally, the New York Taxing Authority asserted that the Debtors and/or certain affiliates owed approximately $510,000 for sales and use taxes. Destination Pet’s outside tax counsel became involved and was instrumental in analyzing strategy, formulating arguments, and negotiating directly with the New York taxing authority to reduce the Debtors’ liability to $123,696, resulting in a $386,304 reduction of tax liability. Similar to the New York tax audit, Destination Pet’s counsel led the effort to resolve issues related to unpaid unemployment insurance taxes owed to the State of Arkansas. In total, Destination Pet seeks $87,564.50 as a substantial contribution administrative claim for the attorneys’ fees that resulted in a direct benefit to the estates.
Payment of Debtors’ Obligations. Destination Pet made numerous payments to maintain essential services or otherwise avoid harm to the acquired business including, but not limited to, franchise taxes, vendor invoices, and software license costs. As detailed herein,
these payments total not less than $92,778.73, and they should be reimbursed as either payment of prepetition or postpetition claims for which the Debtors are liable, as a substantial contribution claim, or under the terms of the APA and related documents.
Payroll processing fees paid by Destination Pet. In consideration of an accelerated closing and as set forth in the Transition Services Agreement, the Debtors agreed to pay for payroll processing services until Destination Pet transferred employees to its own service.
Destination Pet paid up to $34,082.62 (the “Payroll Processing Fee”) for payroll processing services prior to that time that the Debtors were responsible to pay.
5. Prior to filing this Motion, Destination Pet approached the Liquidating Trustee regarding these claims and engaged in thorough and good faith settlement discussions over several weeks. The parties agreed to compromise and resolve certain claims, but only in the context of a comprehensive resolution, which was not reached. Destination Pet intends to continue those discussions and hopefully narrow the issues to be tried at a hearing on this Motion.
JURISDICTION AND VENUE
6. This Court has jurisdiction to consider this Motion under 28 U.S.C. § 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), and (E). Venue is proper under 28 U.S.C.
§§ 1408 and 1409.
7. The statutory predicate for the relief requested herein are sections 363, 365, 502(g), 503(b), and 509(a) of title 11 of the United States Code (the “Bankruptcy Code”).
8. On March 14, 2020, the Court entered the Order (I) Approving Prevailing Bidder’s Asset Purchase Agreement and Authorizing the Sale of Assets Outside the Ordinary Course of Business, (II) Authorizing the Sale of Substantially All of the Debtors’ Assets Free and Clear of
Liens, Claims, Encumbrances, and Interests, (III) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases, and (IV) Granting Related Relief [Docket No.
243] (the “Sale Order”) which approved the sale of substantially all of the Debtors’ assets to Destination Pet pursuant to the terms of an Asset Purchase Agreement (as amended, the “APA”), attached hereto as Exhibit B, negotiated between Destination Pet and the Debtors.
9. Destination Pet’s purchase of substantially all of the Debtors’ assets pursuant to the APA closed on March 27, 2020 (the “Closing Date”). Destination Pet and the Debtors entered into the Transition Services Agreement, attached hereto as Exhibit C, effective March 24, 2020. The Transition Services Agreement sets forth the scope and terms under which the Debtors provided certain transition services to Destination Pet after the Closing Date.
10. After the Closing Date, Destination Pet spent considerable time and effort dealing with operational disputes, including the Debtors’ refusal to transfer electronic records that Destination Pet acquired under the APA. The Debtors also refused to pay the agreed-upon proration “true-up” amount and challenged Destination Pet’s contractual limitation to pay cure costs. Most recently, the Debtors failed to respond to Destination Pet’s letter that outlined the various claims related to the Cigna Health and Life Insurance Company Healthcare Policy #613113 (the “Cigna Agreement”), including turnover of the Security Deposit and allocation of medical claims.
11. On December 17, 2020, the Court entered the Order Confirming the First Amended Joint Combined Chapter 11 Plan and Disclosure Statement of Veterinary Care, Inc. and TVET Management LLC [Docket No. 492] (the “Confirmation Order”). The Plan went effective on December 31, 2020 [Docket No. 506] (the “Effective Date”). The Confirmation Order and Plan
approved the Liquidating Trust Agreement, which appointed John D. Cornwell as the Liquidating Trustee (the “Liquidating Trustee”).
12. On February 1, 2021, the Court entered the Stipulation and Agreed Order Extending Destination Pet LLC’s Deadlines to File any Administrative Claims, Rejection Damages Claims, or Related Motions or Claims [Docket No. 518] (the “Stipulation”) which preserved Destination Pet’s right to assert an administrative claim for any of the Debtors’ tax liabilities that Destination Pet pays or is required to pay in the future. Pursuant to the Stipulation, the deadline to file administrative and rejection damages claims was extended from February 1, 2021 to February 12, 2021.
13. Shortly after the appointment of the Liquidating Trustee, Destination Pet approached the Liquidating Trustee and outlined its claims and arguments in support thereof. The parties engaged in good faith settlement discussions; however, a comprehensive resolution has not been reached. Destination Pet intends to continue such discussions and hopefully narrow the issues to be tried at a hearing on this Motion.
RELIEF REQUESTED AND BASIS THEREFOR
A. This Court Has Authority to Enforce the APA and Sale Order.
14. In the Sale Order, the Court retained exclusive jurisdiction to, among other things, “interpret, implement, and enforce the terms and provisions of this Sale Order, the [Asset Purchase] Agreement, the Other Transaction Documents, and any amendments thereto . . . .” [Docket No. 243 at ¶ 38]. As the Court previously held, the Court has the authority to interpret its Sale Order. See, e.g., In re Shoreline Southeast LLC, No. 16-35579 (DRJ) (Bankr. S.D. Tex. Oct.
10, 2018); In re Seadrill Limited, No. 17-60079 (DRJ) (Bankr. S.D. Tex. Mar. 25, 2019); In re Linn Energy Holdings, LLC, No. 16-60040 (DRJ) (Bankr. S.D. Tex. Apr. 11, 2017); In re
Neighbors Legacy Holdings, Inc., No. 18-33836 (MI) (Bankr. S.D. Tex. Nov. 2, 2018); see also In re WorldCorp, Inc., 252 B.R. 890, 895 (Bankr. D. Del. 2000) (adversary proceeding not necessary when seeking the enforcement of a previously obtained order); In re Rodeo Canon Dev.
Corp., 2010 WL 6259764, *7 (B.A.P. 9th Cir. Oct. 28, 2010).
B. Pursuant to the APA and the Sale Order, Destination Pet is Entitled to the Cigna Security Deposit.
15. Pursuant to the APA, Destination Pet purchased security deposits related to specific contractual obligations. Section 3.2.3 of the Agreement provides that Purchased Assets include:
All cash and negotiable instruments solely to the extent that they constitute deposits securing specific contractual obligations, including performance bonds, surety bonds, letters of credit, guarantees, security deposits, utility deposits or similar assurance outstanding as of the Closing Date (“Contract Deposits”).
Agreement, § 3.2.3 (emphasis added).
16. Accordingly, the Security Deposit required under the Cigna Agreement falls within the category of Purchased Assets that Destination Pet bought in its acquisition of substantially all of the Debtors’ assets. Destination Pet understood that on or about August 27, 2020, Cigna returned a deposit of $70,741.00 to the Debtors. The Liquidating Trustee has taken the position that such deposit was not received by the Debtors. To the extent the Debtors or the Liquidating Trustee receive such deposit, it should be transferred to Destination Pet under the terms of the APA. The Liquidating Trustee should further be required to reasonably cooperate with Destination Pet in obtaining turnover of the deposit from Cigna.
C. The Liquidating Trustee Must Reimburse Destination Pet for Payment of the Cigna Termination Fee.
17. In the Plan, the Debtors rejected all remaining executory contracts, including the Cigna Agreement. The rejection of an executory contract constitutes a breach of the contract and
the counterparty may assert a claim for damages. 11 U.S.C. § 365(a); see also Matter of Brady, Texas, Mun. Gas Corp., 936 F.2d 212, 214 (5th Cir. 1991).
18. Bankruptcy Code section 502(g) provides, in relevant part:
A claim arising from the rejection . . . of an executory contract or unexpired lease of the debtor that has not been assumed shall be determined . . . as if such claim had arisen before the date of the filing of the petition.
11 U.S.C. § 502(g).
19. Accordingly, the counterparty can assert a claim for rejection damages and the breach is considered to have occurred prior to the commencement of the bankruptcy case, leaving the non-debtor party with a general unsecured claim for contract damages. See, e.g., Adelphia Business Solutions, Inc. v. Abnos, 482 F.3d 602, 606 (2d Cir. 2007) (when debtor rejects an unexpired lease, the court considers the contract breached and the lessor can seek damages).
20. The Cigna Agreement contained a contractual charge to terminate the agreement in the amount of $73,869.46 (the “Termination Fee”). As a condition to fulfilling payment of claims, Cigna demanded Destination Pet pay the Termination Fee, which Destination Pet paid.
21. The Cigna Agreement was rejected through the Plan, which rejected all remaining executory contracts. The Confirmation Order provides that:
all Executory Contracts and Unexpired Leases to which the Debtors are a party shall be deemed rejected under section 365 of the Bankruptcy Code unless they (i) were previously assumed or rejected by the Debtors; or (2) are subject to a motion to reject that is pending on the Confirmation Date, or (iii) were otherwise dealt with by the Plan or the Confirmation Order, or any other Order of the Court entered prior to the Effective Date.
Confirmation Order, ¶ 54.
22. Accordingly, the Cigna Agreement was deemed rejected under the Plan and gave rise to a rejection damages claim against the Debtors. The Termination Fee is a valid claim that Destination Pet can assert, as subrogee of Cigna, as a rejection damages claim. See, e.g., In re
Continental Airlines, 981 F.2d 1450, 1459-60 (5th Cir. 1993) (holding that even though a contract is rejected, the measure of damages for the resulting claim is still to be determined by reference to the contract’s terms, because rejection does not terminate or eliminate the contract); In re Independent American Real Estate, Inc., 146 B.R. 546, 553 (Bankr. N.D. Tex. 1992) (finding that enforcement of liquidated damages clause contained in rejected executory contract did not contravene Bankruptcy Code and it would be inequitable to deny creditor remedies permitted under state law).
23. Furthermore, section 509(a) of the Bankruptcy Code provides, in relevant part, “an entity that is liable with the debtor on, or that has secured, a claim of a creditor against the debtor, and that pays such claim, is subrogated to the rights of such creditor to the extent of such payment.” 11 U.S.C. § 509(a). Under section 509(a), an entity is liable with the debtor when the entity is obligated to pay, by law or equity, on a claim of a creditor against the debtor. See CCF, Inc. v.
First Nat’l Bank & Trust Co. of Okmulgee (In re Slamans), 69 F.3d 468, 473 (10th Cir. 1995); Am.
Surety Co. v. Bethlehem Nat’l Bank, 314 U.S. 314, 317 (1941) (holding that “one who has been compelled to pay a debt which ought to have been paid by another is entitled to exercise all the remedies which the creditor possessed against the other”). The debtor must be the party that is primarily liable for the indebtedness. Scott v. Am. Sec. Ins. Co. (In re Scott), 572 B.R. 492, 534 (Bankr. S.D.N.Y. 2017) (“Section 509 implements the public policy . . . to permit subrogation of those secondarily liable with the debtor but to deny subrogation where the paying co-obligor is merely paying its own debt.”) (citation and internal quotation omitted).
24. Destination Pet paid the Termination Fee, an obligation for which the Debtors are primarily liable; therefore, Destination Pet is subrogated to the rights of Cigna and can assert the rejection damages claim against, and recover from, the Liquidating Trustee.
D. The Liquidating Trustee is Obligated to Pay Destination Pet for the Cigna Claims Allocation under the Transition Services Agreement.
25. Destination Pet and the Debtors entered into the Transition Services Agreement effective March 24, 2020, which, among other things, permitted Destination Pet to use the existing group medical insurance plan administered by Cigna under the Cigna Agreement until June 30, 2020. See TSA, §§ 2.1.2 and 4.
26. Pursuant to the Transition Services Agreement, the parties agreed that the Debtors are responsible for all obligations incurred before the Closing Date and Destination Pet is responsible for all obligations incurred after the Closing Date. In cooperation with the Debtors, representatives of Cigna and Destination Pet worked to reconcile and allocate responsibility for the claims arising from the Cigna Agreement (the “Cigna Claims”); however, there were several challenges in making the allocations. For example, notice of a claim may be delayed months after the actual claim was incurred. As a result, many claims for medical expenses that were incurred prior to closing were noticed and tendered for payment after closing and paid for by Destination Pet (the “Incurred and Reported Claims”). The amount of Incurred and Reported Claims is $55,188.79 and Destination Pet has provided the Debtors with the detail and backup regarding this amount. Destination Pet believes that the Debtors agreed to this amount and intends to enforce that agreement.
27. In addition, representatives of Cigna and Destination Pet estimated the amount of claims incurred prior to the Closing Date that still have not been reported (the “Incurred but not Reported Claims” or “IBNR Claims”). The IBNR Claims are based on actuarial calculations of medical expenses not reported prior to the Closing Date that Destination Pet will be required to pay in the future, for which the Debtors should be responsible. Destination Pet calculates the IBNR claims to be $12,563.97. Destination Pet requests payment from the Debtors in this amount.
28. Specifically, the claims related to allocation of liabilities under the Cigna Agreement are summarized as follows:
Claim Type Claim Description Amount
Incurred and Claims incurred prior to $55,188.79
Reported Claims March 27, 2020 that were
reported after March 27,
2020 and have been paid by
IBNR Claims Actuary calculation of $12,563.97
claims for period prior to
March 27, 2020 that will be
reported in the future and
paid by Destination Pet
29. As referenced above, the Debtors agreed to the Cigna Claims allocation, and even absent such an agreement, the claim is justified by the calculations attached hereto as Exhibit D.
E. Destination Pet is Entitled to a Substantial Contribution Claim for Legal Fees that Benefited the Debtors’ Estates.
30. The Bankruptcy Code provides, in relevant part, for the administrative expense treatment of “the actual, necessary expenses, . . . incurred by a creditor, an indenture trustee, an equity security holder, or a committee representing creditors or equity security holders . . . in making a substantial contribution in a case under chapter 9 or 11 of this title.” 11 U.S.C. § 503(b)(3)(D). A “creditor” includes an “entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor” and an entity that has a rejection damages claim against the estate under section 502(g). 11 U.S.C. §§ 101(10)(A)–(B).
31. Section 503(b)(4) of the Bankruptcy Code, in turn, provides for the allowance of an administrative expense for:
reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable under subparagraph (A), (B), (C), (D), or (E) or paragraph (3) of this subsection, based on the time, the nature,
the extent, and the value of such services, and the cost of comparable services other than in a [bankruptcy] case . . . , and reimbursement for actual, necessary expenses incurred by such attorney or accountant.
11 U.S.C. § 503(b)(4).
32. As a threshold matter, Destination Pet has standing to assert a substantial contribution claim because it is a creditor of the Debtors under Section 101(10)(B). Destination Pet is a creditor because, among other things, it holds a rejection damages claim pursuant to Section 502(g) because it paid the Cigna Termination Fee.
33. In addition to its rejection damage claim, Destination Pet has asserted the right to be reimbursed for the payment of certain other prepetition claims, and accordingly is subrogated to the rights of those creditors. Moreover, Destination Pet is a creditor because it holds a pending claim in its own capacity against the Debtors.8
34. Alternatively, the enumerated list of entities with standing to assert a substantial contribution claim under Section 503(b)(3)(D) is not exclusive. See, e.g., In re S & Y Enterps., LLC, 480 B.R. 452, 461 (Bankr. E.D.N.Y. 2012) (holding that a non-creditor unsuccessful bidder had standing to seek allowance of a “substantial contribution administrative expense,” but ultimately finding insufficient evidence of a substantial contribution); see also In re Frog & Peach, Ltd., 38 B.R. 307, 310 (Bankr. N.D. Ga. 1984) (finding the applicant failed to meet the statutory requirement for standing but suggesting non-creditor claimants that directly conferred a benefit upon the debtor and whose claim is outside the literal categories defined in Section 503(b) might have allowable administrative claims); In re Al Copeland Enters., 991 F.2d 233, 238–39 (5th Cir.
1993) (holding that a statutory award of interest on taxes constitutes an administrative expense 8 Destination Pet filed Proofs of Claim Nos. 33 and 69 on April 21, 2020 for the unsecured, unliquidated claim for not less than $137,484.19 based on the Debtors’ breach of the Management Services Agreement.
pursuant to section 503 because “administrative expenses entitled to first priority status are not necessarily confined to those enumerated” in the statute).
35. According to the court in S & Y Enterps., Section 503(b)(3)(D) “opens the door to the possibility that where the estate as a whole directly benefits from an entity’s participation in a Chapter 11 case, that entity’s counsel and expenses may be paid as an administrative expense.” S & Y Enterps., 480 B.R. at 461. The bankruptcy court explained that setting a low bar for standing to seek allowance of a substantial contribution administrative expense was warranted because (1) the “Bankruptcy Code identifies an illustrative, not an exclusive, list of prospective applicants,” and (2) it would not be possible to formulate a comprehensive list that would include every entity that may make a substantial contribution in a chapter 11 case. Id. at 462.
36. The policy behind allowing substantial contribution applications is to “promote meaningful creditor participation in a reorganization process.” In re DP Partners Ltd., 106 F.3d 667, 672 (5th Cir. 1997). The phrase “substantial contribution” is not defined in the Bankruptcy Code. However, the Fifth Circuit has broadly explained that the term generally means a contribution that is “considerable in amount, value or worth,” and that services which make a substantial contribution are those which “foster and enhance, rather than retard or interrupt the progress of reorganization.” See In re Energy Partners, Ltd., 422 B.R. 68, 80 (Bankr. S.D. Tex.
2009) (citing In re DP Partners Ltd., 106 F.3d at 672–73).
37. The determination of whether an entity has provided a substantial contribution is “best left on a case-by-case basis,” and a court should employ a balancing test by weighing, “the cost of the claimed fees and expenses against the benefits conferred upon the estate which flow directly from those actions.” In re DP Partners Ltd., 106 F.3d at 673. Courts are to look for a
synergy of several factors that conspire to push the analysis one way or the other.” In re Am.
Plumbing & Mech., Inc., 327 B.R. 273, 281 (Bankr. W.D. Tex. 2005).
38. Courts have also synthesized and utilized the following seven factors in the substantial contribution inquiry: (1) whether the services involved in the contribution provided a benefit to the debtor’s estate; (2) whether services involved in contribution were undertaken just for the applicant or for the benefit of all parties in the case; (3) whether the applicant would have undertaken the same approach absent expectation of compensation from the bankruptcy court; (4) whether the benefit conferred through the applicant’s contribution exceeds the cost which the applicant seeks to assess against the estate; (5) whether the efforts of the applicant were duplicative of those undertaken by statutory fiduciaries; (6) whether the applicant profited from the situation or rather faced substantial loss if it had not undertaken the approach that it did; and (7) whether applicant’s conduct caused a negative effect on case that offsets the value of any contribution. In re Energy Partners, Ltd., 422 B.R. at 80. As demonstrated below, these factors weigh heavily in favor of finding that Destination Pet substantially contributed to the case.
39. The New York Taxing Authority commenced an audit and asserted that the Debtors and/or certain affiliates owed approximately $510,000 for sales and use taxes for the tax periods of December 1, 2016 through May 31, 2019. Concerned with the potential impact of these liabilities on its ongoing business operations, Destination Pet became involved in the audit. In particular, Destination Pet’s outside tax counsel, Holland & Hart (“H&H”) was instrumental in analyzing strategy, formulating arguments, and negotiating directly with the New York taxing authority. These efforts, along with support from the Debtors’ staff, resulted in a resolution that required the Debtors to pay only $123,696 out of the $510,000 originally sought by the State of
New York. Destination Pet incurred attorneys’ fees of $54,567.00 in negotiating this outcome that directly benefits the estates.
40. In addition to the substantial contribution claim related to the Debtors’ reduced New York tax claim, Destination Pet seeks attorneys’ fees in the amount of $32,997.50 for work performed in connection with analyzing and resolving unpaid unemployment insurance taxes owed to the State of Arkansas. Until Destination Pet became involved, the Debtors never registered for, reported, or paid unemployment insurances taxes in connection with wages paid to any of its past or current employees since their obligation to do so arose in 2018. Consequently, the Debtors’ faced past-period tax liability, estimated to be less than $100,000, as well as a potential audit by the Arkansas Department of Workforce Services, interest, and penalties due to their failure to report and pay unemployment insurance taxes over multiple periods. In order to understand the potential impact of these liabilities on its ongoing business operations, Destination Pet’s counsel worked with the Arkansas taxing authority to complete the registration for and reporting of unemployment insurance taxes that the Debtors failed to pay for nearly two years.
a. Factor #1: The services involved in the contribution provided a benefit to the Debtors’ estates.
41. This factor weighs considerably in favor of a substantial contribution finding because H&H’s negotiations with the New York taxing authority directly resulted in a $386,304 reduction in tax liability for the estates. Similar to the New York taxing authority audit, H&H led the effort to quantify the amounts owed and resolve outstanding issues related to the Arkansas unemployment insurance taxes.
b. Factor #2: The services involved in the contribution were undertaken for the benefit of all parties.
42. “[N]othing in the Bankruptcy Code requires a self-deprecating, altruistic intent as a prerequisite to recovery of fees and expenses under section 503.” In re DP Partners Ltd., 106 F.3d at 673); see also In re R.L. Adkins, 505 B.R. 770, 781-82 (Bankr. N.D. Tex. 2014) (finding that despite the claimant acting with self-interest, a substantial contribution was appropriate).
Indeed, the applicant need only show that its actions directly and demonstrably benefited the estate.
In re DP Partners Ltd., 106 F.3d at 672.
43. Destination Pet became involved in the New York and Arkansas tax matters because of concern over the potential impact of the tax liabilities on its ongoing business operations, but with the shared interest with the Debtors in reducing potential tax liability. Under the case law, this is clearly a permissible motive and Destination Pet was not required to act with a completely altruistic motive. Accordingly, even after reimbursement of Destination Pet’s fees, the ultimate result is a substantial benefit for the estates that can be shared by all creditors.
c. Factor #3: Destination Pet acted knowing that it may not receive compensation.
44. This factor “should only be given moderate weight as any party hoping to apply for administrative expense priority under § 503(b) must surely realize that there is no guaranty of such an application being granted; they merely have a hope.” In re R.L. Adkins Corp., 505 B.R. 770, 782 (Bankr. N.D. Tex. 2014); In re Mirant Corp., 354 B.R. 113, 133 (Bankr. N.D. Tex. 2006) (“The court is disinclined to place much weight on this factor.”). Nevertheless, Destination Pet acted without regard for receiving compensation of this type.
d. Factor #4: The benefit conferred through Destination Pet’s contribution exceeds the cost which Destination Pet seeks to receive.
45. This factor weighs in favor of a substantial contribution finding. Through Destination Pet’s efforts, the tax liability of the Debtors’ decreased from $510,000 originally sought by the State of New York to $123,696. Even after reimbursement of Destination Pet’s fees, the result is a substantial benefit for the estates. Similarly, Destination Pet’s efforts to quantify amounts owed in Arkansas unemployment insurance taxes (estimated at less than $100,000) as well as report and remit such unpaid amounts to the taxing authority likely prevented a formal audit of the Debtors and subsequent costly issues. This benefit conferred exceeds H&H’s fees in the amount of $32,997.50.
e. Factor #5: Destination Pet’s efforts were not duplicative of statutory fiduciaries.
46. Destination Pet coordinated with the Debtors and did not duplicate work performed by any other party or usurp any of the Debtors’ duties. Courts in the Fifth Circuit are clear that activities of creditors that are “ordinary, expected, routine, or duplicative do not constitute a substantial contribution to a debtor’s estate.” In re Asarco LLC, No. 05–21207, 2010 WL 3812642, *8 (Bankr. S.D. Tex. Sept. 28, 2010) (holding that an applicant must show that the asserted contribution would not have occurred without their involvement); see e.g., In re Mirant Corp., 354 B.R. 113, 136 n. 62 (Bankr. W.D. Tex. 2006) (denying fees to ad hoc committee for work which largely duplicated the official committee’s work because recovery would have been the same without the claimant’s participation); In re Buttes Gas & Oil Co., 112 B.R. 191, 196 (Bankr. S.D.
Tex. 1989) (indenture trustee did not sustain its burden of showing substantial contribution as it merely performed normal tasks and duties required under its trust); In re Consol. Bancshares, Inc., 785 F.2d 1249, 1253 (5th Cir. 1986) (holding that applicant did not make a substantial contribution
where its legal services, such as research and telephone conversations, duplicated those of an equity security holders’ committee).
47. Here, Destination Pet’s efforts did not duplicate or usurp those of any statutory fiduciary. For example, Destination Pet led the New York tax negotiations that the Debtors chose not to engage in, as well as handled the registration for and reporting of Arkansas unemployment insurance taxes that the Debtors failed to pay for nearly two years. In fact, the Debtors had not even attempted to resolve these issues before Destination Pet became involved. Destination Pet’s counsel was not merely performing normal tasks expected of a creditor, but went above and beyond what the Debtors had done or could reasonably be expected to do. Moreover, the contribution would not have occurred without Destination Pet’s involvement. Destination Pet’s attorneys were the only attorneys involved in communicating with the New York taxing authority and resolving the New York tax claim because the Debtors chose to not involve the Debtors’ lawyers. Without Destination Pet’s tax professionals counsel handling these settlement negotiations with the New York and Arkansas taxing authorities, it is unlikely that the total tax liability would have been reduced by over $380,000, a noteworthy result. Accordingly, Destination Pet could not have duplicated actions or “usurped” duties that the Debtors failed to undertake. Therefore, this factor also weighs in favor of substantial contribution.
f. Factor #6: Destination Pet did not profit from the situation, but may have faced substantial loss.
48. Destination Pet is not seeking to obtain a profit from its involvement in the Debtors’ bankruptcy. Rather, Destination Pet is seeking an administrative claim for legal fees incurred to obtain the best result possible for the Debtors, and by extension, minimize any risk to Destination Pet. But for Destination Pet’s efforts, the Debtors would have faced greater tax liabilities if the
agreement was not reached with the relevant taxing authorities. Therefore, this factor weighs in favor of substantial contribution.
g. Factor #7: Destination Pet’s efforts positively affected the case.
49. This factor examines whether the applicant “had a negative effect on the case, such as making questionable objections to pleadings filed by the debtor or engaging in improper conduct in some other fashion, resulting in the debtor incurring costs of which delayed the resolution of the case.” In re R.L. Adkins Corp., 505 B.R. 770, 783 (Bankr. N.D. Tex. 2014). Here, Destination Pet did not engage in conduct that would delay the bankruptcy or result in needless costs or expenses. In fact, Destination Pet was the source of the funds that made this case a success.
50. The undisputed facts before the Court clearly establish that Destination Pet made a substantial contribution in this case that deserves compensation in the form of reasonable attorneys’ fees and reimbursement of expenses. Destination Pet provided services that satisfy all seven factors that courts examine to determine whether a creditor made a substantial contribution to the bankruptcy proceeding. Here, Destination Pet has incurred “actual, necessary expenses” in the form of $87,564.50 for legal fees that culminated in an extraordinary benefit for the Debtors and the estates. As such, Destination Pet is entitled to recover all actual and necessary expenses incurred in connection with negotiating a favorable resolution of the Debtors’ aforementioned tax issues.
51. Thus, Destination Pet’s services enhanced the estates and qualify as a substantial contribution for which Destination Pet is entitled to payment of their legal fees in the total amount of $87,564.50 as an allowed administrative expense.
52. In addition, Destination Pet submits that H&H’s legal fees associated with making the substantial contribution to the Debtors’ estates are reasonable under the Bankruptcy Code.
Pursuant to section 503(b)(4), the reasonableness of compensation for professional services is measured based on time, nature, extent, and the value of the services rendered and whether related expenses are actual and necessary. 11 U.S.C. § 503(b)(4). Destination Pet’s legal fees satisfy the requirements of section 503(b), especially considering the time, labor, and skills necessary to successfully negotiate a tax audit and properly resolve years of unpaid unemployment insurances taxes. Further, the fees charged by H&H are customary and similar to fees charged to clients in similar matters.
53. Time and Labor Required. The professional services rendered by H&H required them to expend considerable time and effort on a continuous basis for over four months. The services rendered by H&H also required a high degree of professional competence and expertise.
54. Skills Necessary to Perform the Legal Services Properly. H&H’s expertise in the area of tax law and their innovative approaches to the resolution of issues contributed to the ultimate benefit of the Debtors’ estates.
55. Reasonable Fees. H&H’s relevant time entries that Destination Pet seek to be reimbursed are attached hereto as Exhibit E. The fees and expenses described therein are both reasonable and typical. The hourly rates of H&H are substantially similar to the professional firms representing the Debtors and other parties in these and similar Chapter 11 Cases.9 Finally, the thousands of dollars in direct savings to the Debtors’ estates from the actions of Destination Pet and its counsel far exceed the amount of fees for which reimbursement is sought in this Motion.
The requested amount is just over 22% of the $386,304 in savings achieved.
9 See First and Final Fee Application of Okin Adams LLP, Counsel for the Debtors for the Period November 8, 2019 through December 30, 2019 [Docket No. 509] demonstrating an average hourly rate of $449.09 for professionals.
56. Destination Pet’s successful efforts in the negotiation and resolution of two separate tax issues resulted in a substantial contribution to the Debtors’ estates, generating combined savings for the Debtors’ estates of at least $386,304 in reduced tax liability. Accordingly, Destination Pet requests the Court allow and authorize the Debtors to reimburse Destination Pet for its reasonable fees and expenses incurred by Destination Pet’s counsel as an administrative expense under sections 503(b)(3)(D) and 503(b)(4).
F. Destination Pet’s Administrative Claims for Paying Other Obligations that Benefited the Debtors’ Estates.
57. After the Closing Date, Destination Pet was presented with numerous claims that were the Debtors’ responsibility. In many cases, Destination Pet paid these claims (as summarized in the chart below) to maintain essential services or otherwise avoid harm to the acquired business.
Including but not limited to, franchise taxes, vendor invoices, and software license costs.
Destination Pet also paid certain other claims that were the Debtors’ responsibility, and thereby provided value to the Debtors’ estates.
58. A summary of these claims is set forth in the chart below.10Description of Claim Original Amount Legal Basis/Comment
NY Sales Tax Penalty, Feb. 2020 (pre- $1,393.64 APA; Plan
Cost to correct pre-closing ADA violation $1,225.00 APA; Plan; 503(b) Arkansas Franchise Taxes 2020 $150.00 APA; Plan
Debtors’ prorated share of cost to prepare $13,500.00 APA; Plan federal and state tax returns for physician
Unpaid pre-closing waste removal (paid to $785.04 APA; Plan; 503(b) keep service)
Unpaid pre-closing Texas A&M GI Lab $267.00 APA; Plan; 503(b) invoices (paid to keep service)
10 Note that the legal basis for some of these claims may be the APA or Section 503(b). However, they are grouped together here for efficiency.
Payment for pre-close patient claim for $845.55 APA; Plan; 503(b) which VP did not obtain a release and DP
had to pay
BioMedical Waste Solutions invoice $60.50 APA; Plan; 503(b) ERP software license cost $15,000.00 APA; TSA; 503(b)
Ultrasound equipment that Vital Pet agreed $19,552.00 APA; 503(b) to purchase but did not pay for
Debtors’ non-payment to doctors related to $40,000.00 APA; 503(b) online pharmacy
Arkansas Unemployment Taxes (and other Unknown Payments by DP are being state taxes) confirmed
Regulatory inquiry regarding dog euthanized N/A No payment by DP to date on 3/12/20
Demand Letter regarding pre-closing rental N/A No payment by DP to date car damage
Lawsuits related to Monroe storage tank N/A No payment by DP to date failure
Potential penalties for not filing Colorado N/A No payment by DP to date personal property tax declarations
EEOC Demand related to Staten Island N/A Resolved by VP Stipulation location
Total not less than: $92,778.73
59. Destination Pet’s payment of these obligations ultimately benefitted the Debtors because they are obligations that the Debtors were legally required to pay, either pursuant to the APA, pursuant to Section 503(b), or the Plan. Therefore, the total for paying these miscellaneous obligations is not less than $92,778.73, and Destination Pet should be reimbursed as either payment of prepetition claims or payment of postpetition claims for which Destination Pet is entitled to payment as an administrative claim under section 503(b)(1) or as a substantial contribution claim under section 503(b)(3)(D) and 503(b)(4).
60. Bankruptcy Code Section 503(b) provides an administrative expense claim for the “actual, necessary costs and expenses of preserving the estate.” See In re ASARCO LLC, 441 B.R.
813, 823-24 (S.D. Tex. 2010). Alternatively, Section 503(b)(3)(D) provides an administrative expense of “the actual, necessary expenses, other than compensation and reimbursement specified
in paragraph (4) of this subsection, incurred by a . . . creditor . . . in making a substantial contribution in a case. 11 U.S.C. § 503(b)(3)(D).
61. To qualify as an “actual and necessary cost” under section 503(b)(1)(A), “a claim against the estate must have arisen post-petition and as a result of actions taken by the trustee [or debtor-in-possession] that benefited the estate.” Nabors Offshore Corp. v. Whistler Energy II, L.L.C. (In re Whistler Energy II, L.L.C.), 931 F.3d 432, 441–43 (5th Cir. 2019) (citing Total Minatome Corp. v. Jack/Wade Drilling, Inc. (In re Jack/Wade Drilling, Inc.), 258 F.3d 385, 387 (5th Cir. 2001)). A claim for administrative expenses is “actual and necessary” only if the expenses incurred benefitted the estate. Texas v. Lowe (In re H.L.S. Energy Co., Inc.), 151 F.3d 434, 438 (5th Cir. 1998) (“If [an expense] was no ‘benefit’, it cannot have been ‘necessary.’”).
i. Destination Pet’s Administrative Expense Claims Arise from a Transaction with or Inducement by the Debtors-in-Possession.
62. This requirement is satisfied because Destination Pet’s administrative expense claim is predicated on the Debtors’ post-petition management of the business. Indeed, Destination Pet became aware of, and in some cases paid, these obligations of the Debtors after the Closing Date of the sale of substantially all of the Debtors’ assets to Destination Pet. The Debtors’ failure to pay the obligations induced payment by Destination Pet in order to maintain essential services or otherwise avoid harm to the acquired business.
ii. Destination Pet’s Administrative Expense Claims Arise from Actions Taken by the Debtors that Benefitted the Debtors’ Estates.
63. Expenses that benefit the estate include those incurred for the preservation and maintenance of the estate’s assets as well as costs of operating a business, such as the cost of supplies and utilities. See, e.g., In re TransAmerican Natural Gas Corp., 978 F.2d 1409, 1416, 1420 (5th Cir. 1992) (postpetition supplies were actual, necessary cost of preserving the estate); In re Ridgewood Sacramento, Inc., 20 B.R. 443, 446 (Bankr. E.D. Cal. 1982) (“The supply of goods
to a Chapter 11 debtor is just as necessary to pursue the operation of the debtor’s business as is the payment of wages, salaries or commissions.”).
64. Destination Pet has and will demonstrate that the expenses in question were actual and necessary costs for the operation of the business and that the estates actually received a benefit from Destination Pet’s payment of the Debtors’ obligations. Destination Pet conferred a benefit to the estates by paying for waste removal utilities, lab invoices, software license, ultrasound equipment, and doctor and/or pharmacist fees necessary for the Debtors to conduct its business.
The goods or services supplied enhanced the ability of the Debtors’ business to function as a going concern. Thus, Destination Pet’s payment of the Debtors’ obligations gives rise to an administrative expense claim as contemplated by Section 503(b) of the Bankruptcy Code. To the extent that any of these claims arose prepetition, Destination Pet is entitled to be reimbursed pursuant to the Plan treatment of prepetition unsecured claims.
65. Similarly, the payments related to the ADA violation and patient claim constitute allowable administrative expenses. Many courts have reasoned that if the estate receives a benefit from a third party, then administrative priority prevents unjust enrichment by requiring the estate to pay for the reasonable value of the benefit. See TransAmerican Nat. Gas Corp., 978 F.2d at 1419; see also Matter of H.L.S. Energy Co., Inc., 151 F.3d 434, 437–37 (5th Cir. 1998) (though costs incurred by the state for plugging abandoned wells did not “benefit” the estate—as the Trustee would have preferred not to pay those costs at all—the Fifth Circuit held that such post-petition obligations were entitled to administrative priority because the costs were necessary for the estate to pay under state law). Compelling the estate to pay for costs ordinarily incident to the operation of the debtor’s business prevents the estate from obtaining an unfair advantage in its business operations. See, e.g., In re J.A.V. Ag., Inc., 154 B.R. 923, 929–30 (Bankr. W.D. Tex.
1993) (holding that the estate benefitted from the use and possession of the trucks regardless of who was acting for the estate at the time, and to allow the estate to benefit from the use and possession of the trucks without requiring it to pay the costs associated with their usage would unjustly enrich the estate). Consequently, denying allowance of these payments as administrative expenses would unjustly enrich the Debtors’ estates.
66. Furthermore, there are additional claims related to the Debtors’ pre-closing tax obligations that have yet to be determined. After the Closing Date, Destination Pet learned that the Debtors had not timely, and in some cases, never, paid various tax claims asserted by federal and state taxing authorities. In tracking the various tax obligations, Destination Pet has confirmed that there are processes in Arkansas, New York, and Texas, and likely in Louisiana, to determine whether, and in what amount, these obligations exist. Destination Pet requests that the Court establish a future deadline by which to assert yet to be determined tax claims that Destination Pet pays.
67. In sum, payment of these obligations arose post-petition and benefitted the estate as operating and preservation expenses of the Debtors’ business. Not according these claims administrative status would unjustly enrich the estates at the expense of Destination Pet, an entity whose purchase of the Debtors’ assets provided the funds to make this case a success. Thus, Destination Pet respectfully requests entry of an order allowing an administrative expense claim totaling not less than $92,778.73.
G. The Liquidating Trustee is Obligated to Pay Destination Pet for the Payroll Processing Fee Incurred under the Transition Services Agreement.
68. Destination Pet and the Debtors entered into the Transition Services Agreement effective March 24, 2020, which, among other things, permitted Destination Pet to use the existing payroll processing service until June 30, 2020. See TSA, §§ 2.1.2 and 4.
69. Through the sale process, the Debtors sought to accelerate the closing, a request Destination Pet accommodated subject to certain requirements ultimately covered by the Transition Services Agreement. First, the parties agreed that Destination Pet could use the Debtors’ payroll processing services until Destination Pet transferred employees to its own service in order to accelerate the closing of the APA. Specifically, the Transition Services Agreement provides:
Commencing at Closing and for the Duration, Sellers shall provide, at Sellers’ expense subject to Section 2.6 below, using Sellers’ existing systems and vendors (to the extent not assigned to Buyer at Closing), the following human-resources services to the Transferred Employees (collectively, “Business HR Services”): (a) employment and employee-benefits transition; and (b) payroll processing through the applicable third party payroll processor used by Sellers, and (c) continuing access to and participation in Sellers’ medical, dental, vision, and other benefits under the Benefit Plans for the Duration.
TSA, § 2.1.2 (emphasis added).
70. In order to avoid the delay of processing employees onto Destination Pet’s payroll system, the Debtors offered to let Destination Pet use their Paycom payroll processing system until Destination Pet was ready to switch employees to its own Paylocity payroll processing system. To induce Destination Pet to do so and, thus, guarantee an earlier closing, the Debtors agreed to pay all Paycom fees so that Destination Pet would not pay double fees (fees to both Paylocity and Paycom).
71. Section 2.1.2 expressly relates to such services, which duplicated systems like payroll processing, medical, dental and other plans, and the full range of HR products and services that Destination Pet already had in place. Because these were duplicative of their own systems, Destination Pet had no interest in acquiring or paying for these HR systems upon closing. Yet, as referenced above, the Debtors agreed to pay all the fees related to these systems to induce Destination Pet to accelerate the closing.
72. On the other hand, Destination Pet purchased certain of the Debtors’ business systems that did not duplicate its own systems in place, and continued to use the business system as part of Destination Pet’s ongoing business. An example of this is vendor contracts. The Debtors had certain relationships with vendors that Destination Pet did not have, and as part of the acquisition Destination Pet purchased and retained those contracts.
73. In contrast to Section 2.1.2 of the Transition Services Agreement, Section 2.6 references that Destination Pet would pay for those systems that were incorporated into the Destination Pet operations. Section 2.6 states the following:
Sellers will not charge a fee to Buyer for providing the Transition Services, and Sellers shall be responsible for paying the wages and compensation of each Transition Employee unless and until such Transition Employee is hired by Buyer or no longer employed by Sellers. Buyer shall be responsible for paying for operation of the business after Closing including paying the following for all periods from and after the Effective Date: (a) any third party fees and out of pocket expenses incurred in connection with providing the Transition Services including fees of banks related to the Accounts, fees of any third party payroll providers, credit card processing fees, etc., (b) the funding of all payroll obligations of Buyer for periods after the Closing Date, (c) insuring that sufficient funds are maintained in the Accounts to operate the business and cover all Business Cash Management Services after the Closing Date, and (d) providing all benefits to employees of Buyer and the business (other than Transition Employees while employed by Sellers) after Closing regardless of whether such benefits are provided under Sellers’ existing benefit plans or under new benefit plans enacted by Buyer after the Closing.
TSA, § 2.6 (emphasis added).
74. Under the plain language of Section 2.6, the Debtors would pay the compensation of each Transition Employee “unless and until such Transition Employee is hired by Buyer” – that is, becomes part of and is incorporated into Destination Pet’s business. Furthermore, Destination Pet would be responsible for “operation of the business after Closing” – that is, after the Debtors’ business was purchased by Destination Pet, then Destination Pet had the risk and costs of operating the business. Those costs included “(a) any third party fees and out of pocket expenses incurred
in connection with providing the Transition Services [that Destination Pet incorporated into their business].” Accordingly, Destination Pet would only pay for non-duplicative business systems that were incorporated into Destination Pet’s operations. In other words, if and when Destination Pet incorporated the business system into its operations, then and only then would Destination Pet pay for such services.
75. Therefore, in consideration of an accelerated closing and as set forth in the Transition Services Agreement, the Debtors agreed to pay for the Payroll Processing Fee. Despite this agreement, Destination Pet incurred and paid up to $34,082.62 to Paycom (the Debtors’ service provider) to maintain these essential services before it was required to by agreement.11Consequently, Destination Pet seeks reimbursement of the fees that the Debtors agreed to satisfy under the Transition Services Agreement.
76. In sum, Destination Pet paid amounts that were the Debtors’ obligations pursuant to the APA, Transition Services Agreement and other amounts that must be reimbursed as either payment of prepetition claims or payment of postpetition claims for which Destination Pet is entitled to payment as an administrative claim under section 503(b) or as a substantial contribution claim.
77. For the reasons set forth herein, Destination Pet respectfully requests that the Court enter an order, substantially in the form attached hereto (the “Proposed Order”): (a) enforcing the APA and Sale Order, requiring the Liquidating Trustee to pay and reimburse Destination Pet for amounts due under the APA and Sale Order in the total amount of $172,576.38; (b) allowing and 11 A summary of the Payroll Processing Fee incurred is attached hereto as Exhibit F.
awarding Destination Pet a claim of $180,343.23 for Destination Pet’s substantial contribution claim and payment of prepetition and postpetition claims; and (c) allowing and awarding $73,869.46 in rejection damages claims for payment of the Cigna Termination Fee.
Dated: February 12, 2021
By: /s/ Eric M. English
Eric M. English
State Bar No. 24062714
Emily D. Nasir
State Bar No. 24118477
Porter Hedges LLP
1000 Main Street, 36th Floor
Houston, Texas 77002
ATTORNEYS FOR DESTINATION
CERTIFICATE OF SERVICE
I certify that on the afternoon of February 12, 2021, a true and correct copy of the foregoing Motion was served by CM/ECF and/or First Class United States Mail to all parties appearing in these cases.
/s/ Eric M. English
Eric M. English