In re Specialty Retail Shops Holding Corp., CASE NO. BK19-80064 (Jointly Administered)

606 B.R. 361

In the MATTER OF: SPECIALTY RETAIL SHOPS HOLDING CORP., et al.¹ , Debtor(s).

CASE NO. BK19-80064 (Jointly Administered)

United States Bankruptcy Court, D. Nebraska.

Signed August 30, 2019

Michael T. Eversden, Lauren R. Goodman, James J. Niemeier, McGrath, North, Mullin & Kratz, P.C. LLO, Omaha, NE, Patrick J. Nash, Jr., Kirkland & Ellis LLP, Chicago, IL, for Debtor(s).

ORDER

Thomas L. Saladino, Chief Judge

This matter is before the court on the Request for Payment of Administrative Expense Claim filed by creditors McKesson Biologics and Plasma, LLC and McKesson Corporation, Inc. (Filing #782); Objection filed by Debtors (Filing #1386); Amended Objection filed by Debtors (Filing #1702), and Response to Amended Objection filed by McKesson Corporation, Inc. (Filing #1801). On June 25, 2019, the parties entered into a Stipulation for an Agreed Schedule Regarding McKesson Corporation's Asserted Administrative Claims (Filing #1623). A hearing was held on August 19, 2019, and evidence was received. Travis Bayer and Jenna Stupar appeared for Debtors. Jeffrey Garfinkle and Michael Whaley appeared for McKesson Biologics and Plasma, LLC and McKesson Corporation, Inc. (collectively "McKesson").

For the reasons that follow, McKesson's Request for Payment of Administrative Expense Claim is denied.

Background

The basic facts underlying McKesson's Request are not in dispute.

1. On March 29, 2019, McKesson filed a Request for Payment of Administrative

Claim (Filing #782). In that request, McKesson asserted that: "Pursuant to a settlement agreement between McKesson and Debtors, McKesson is entitled to superpriority [§] 507(b) administrative claim on account of its reclamation and/or marshalling rights, subject to certain conditions." McKesson asserted that it was filing the request to preserve its rights to an administrative claim if and when the conditions are met.

2. Prior to the commencement to this bankruptcy case, McKesson supplied most of the pharmaceutical goods sold by the retail pharmacies owned or operated by the Debtors.

3. McKesson's Proof of Claim (No. 1753) asserts that McKesson was owed $70,561,775.90 on the petition date. That claim contained three components – (a) a § 503(b)(9) claim for goods delivered to the Debtors in the 20 days prior to the petition date in the amount of $1,973,887.80; (b) a "Reclamation Claim" for goods sold to the Debtors in the 45 days prior to the petition date, less the amount of the § 503(b)(9) claim, in the amount of $36,190,535.08; and (c) a general unsecured claim for goods sold prior to 45 days before the petition date in the amount of $32,397,353.17. This order pertains only to the Reclamation Claim portion of McKesson's proof of claim.²

4. For purposes of this order there does not seem to be any dispute regarding the asserted amount of the Reclamation Claim. There also does not appear to be any dispute that McKesson complied with applicable state law in making a timely reclamation demand prior to bankruptcy filing. McKesson also filed a complaint in the State of Wisconsin Circuit Court seeking to reclaim the pharmaceutical goods. The state court denied a temporary restraining order but scheduled a hearing on McKesson's request for a preliminary injunction. This bankruptcy case was filed before that hearing could take place.

5. Debtors filed numerous first-day motions on the petition date, including a motion for entry of an order to establish bidding procedures for its pharmacy assets. That same day, McKesson objected to the Debtors' motion to sell the pharmacy assets as well as the Debtors' motion regarding post-petition financing, asserting that those transactions impaired McKesson's reclamation rights and marshaling rights. In addition, two days after the bankruptcy case was filed, McKesson filed a motion to transfer venue of this bankruptcy case to the Eastern District of Wisconsin.

6. McKesson and the Debtors entered into a Stipulation and Settlement Agreement dated as of January 25, 2019, which is attached to a Motion for Approval of Settlement (Filing #229). This Court granted the Motion to Approve the Settlement Agreement on March 15, 2019, (Filing #684).

For purposes of this Order, the material terms of the Settlement Agreement are as follows:

1. Upon execution of this Stipulation, McKesson will withdraw its objections to and will not contest entry of orders related to the DIP Motion and the Pharmacy Sale Motion, and McKesson shall withdraw the Venue Motion with prejudice.

2. McKesson retains any rights it may have as of the date of this Stipulation, to the extent provided under the Bankruptcy Code or applicable law, to assert a claim and file a proof of claim for reclamation with respect to the Pharmaceutical Goods and marshaling rights, if any; provided that (a) any such claims and rights of McKesson shall be junior and subordinate in all respects to the liens, claims, and interests of the Agent and Lenders in the Collateral to the extent set forth in the Interim DIP Order or Final DIP Order; and (b) except as specifically set forth in paragraph 5, below, McKesson shall not assert (other than by filing a proof of claim) any such reclamation claims or marshalling rights, or seek adequate protection or a 507(b) Claim (as defined below) in connection with any such claims or rights, until the earlier of (i) the final indefeasible payment in full of all Obligations in accordance with the terms of the Loan Agreement and Interim DIP Order or Final DIP Order, as applicable; or (ii) the entry of final non-appealable orders (A) granting an Objection filed by any party other than McKesson in accordance with the Interim DIP Order or Final DIP Order that invalidates all liens of the Agent and Lenders on the Pharmaceutical Goods, and (B) denying any application of the Agent and Lenders for an administrative expense claim in connection with the Interim DIP Order or Final DIP Order, or in connection with the Loan Agreement or any funds advanced by the Lenders to the Debtors. For the avoidance of doubt, this Stipulation and Agreement shall not modify, impair, or waive an[y] arguments or defenses of Debtors or any other party in defense or opposition to any such claims or arguments of McKesson. For the further avoidance of doubt, McKesson is permitted to file a proof of claim against the Debtors' estates on account of its reclamation claims and marshaling rights.

3. If (a) all Pre-Petition Obligations and Post-Petition Obligations (subject to Section 4.1 of the Interim DIP Order or Final DIP Order, as applicable) are indefeasibly paid in full in cash in accordance with the Loan Agreement, and (b) the Court enters a final order providing that, as of the Petition Date, McKesson held a valid enforceable reclamation claim with respect to the Pharmaceutical Goods and enforceable marshaling rights related to the reclaimed Pharmaceutical Goods, then McKesson shall receive a superpriority claim to the extent allowed under section 507(b) of the Bankruptcy Code for the value of the reclamation and marshaling claims (the "507(b) Claim"); provided that any such 507(b) Claim shall be junior and subordinate in all respects to any allowed administrative claim of the Agent and Lenders pursuant to the Interim DIP Order or Final DIP Order, or in connection with the Loan Agreement or any funds advanced by the Lenders to the Debtors.

7. On July 12, 2019, in accordance with the agreed schedule set forth in the stipulation between the parties, the Debtors filed their Amended Objection to McKesson's Request for Allowance of Administrative Expenses (Filing #1702) and McKesson filed its Response (Filing #1801).

Discussion

McKesson asserts it is entitled to a superpriority administrative claim under Bankruptcy Code § 507(b) because it meets the requirements for such a claim under the Settlement Agreement. McKesson is correct that its entitlement to an administrative claim is governed by the Settlement Agreement. That is, McKesson bargained away its objections to various pending motions based on its reclamation demand in exchange for the protections of the Settlement Agreement. That agreement gave McKesson the opportunity to receive a superpriority administrative claim under § 507(b) if certain conditions are met. The conditions are that (a) all of the obligations owed to the DIP lenders are "indefeasibly paid in full in cash in accordance with the Loan Agreement," and (b) "the Court enters a final order providing that, as of the Petition Date, McKesson held a valid enforceable reclamation claim with respect to the Pharmaceutical Goods and enforceable marshaling rights related to the reclaimed Pharmaceutical Goods."

1. Has McKesson met the requirement of paragraph 3 of the Settlement Agreement that all of the obligations owed to the DIP lenders are "indefeasibly paid in full in cash in accordance with the Loan Agreement"?

Debtors argue that the DIP lenders will never be "indefeasibly paid in full in cash in accordance with the Loan Agreement" under the terms of the confirmed plan in this case. Specifically, under the confirmed plan the Lenders will not receive and have waived the right to collect approximately $96,000.00 of default interest. Therefore, according to the Debtors, McKesson cannot possibly meet the threshold requirement to assert a claim under the Settlement Agreement.

McKesson disagrees. It argues that the confirmed plan created a new contractual relationship that replaced the obligations of the Loan Agreement and the confirmed plan obligations have been (or will shortly be) paid in full. The Lenders accepted the plan treatment as an accord and satisfaction of the Loan Agreement obligations. Further, when the Lenders elected to forgo the right to charge and collect default interest, the default interest never became part of the obligations owed.

I tend to agree with McKesson on this issue. While Debtors may technically be correct that the DIP lenders will never be paid in full in accordance with...