Opinion
Case No. 03-11540, (Jointly Administered).
February 18, 2005
PACHULSKI, STANG, ZIEHL, YOUNG, JONES WEINTRAUB P.C., New York, By: William P. Weintraub, Esq. Ilan D. Scharf, Esq., Attorneys for the Debtors and Debtors in Possession.
JP MORGAN CHASE, New York, By: James Laughlin, Esq., Attorneys for J.P. Morgan Securities Inc.
POST-HEARING OPINION ON SPIEGEL'S OBJECTION TO CLAIM NUMBER 2192 OF J.P. MORGAN SECURITIES, INC.
Matter Before the Court
Before the Court is an objection to claim number 2192 in the amount of $3,528,995.26, filed on September 15, 2004 by debtor Spiegel, Inc. and its affiliates (the "Debtors") against claimant J.P. Morgan Securities, Inc. ("J.P. Morgan" or "Claimant"). The Claimant filed a response and post-hearing memoranda of law to substantiate its claim. On November 23, 2004, this Court heard oral arguments on the motion. The following is the decision of the Court.
Rule of Law
The Motion is governed by 11 U.S.C. § 502(b)(1) and Rules 3001 and 3007 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"). Section 502(b) provides in relevant part:
Except as provided in subsections (e)(2), (f), (g), (h) and (i) of this section, if such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim as of the date of the filing of the petition, and shall allow such claim in lawful currency of the United States in such amount, except to the extent that
(1) such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.
Facts and Procedural History
Spiegel, Inc. is a Delaware Corporation with a principal place of business located in Downers Grove, Illinois. Prior to March 17, 2003, Spiegel, Inc. and its affiliates operated several businesses including, retail clothing stores Ultimate Outlet, Inc., Newport News, Inc., Eddie Bauer, Inc., the Spiegel Catalog (collectively, the "Merchant Companies") and First Consumers National Bank (the "Bank"). The Bank issued traditional Visa, Mastercard and private label credit cards. Transcript ("Tr.") of November 23, 2004 Hearing at 7:14-20. The private label credit cards were used by consumers at Spiegel's Merchant Companies. Debtors' Reply at 2. By 2002, Spiegel decided to sell its credit card businesses. Tr. at 7:21-23. Spiegel retained J.P. Morgan to help market and sell the credit card businesses operated by the Bank. Debtors' Reply at 2. On February 20, 2002, Spiegel and J.P. Morgan entered into an Engagement Letter. Tr. at 24-25. Under the terms of the Engagement Letter, J.P. Morgan would act as a financial advisor to Spiegel in connection with a "possible Transaction" between Spiegel and its subsidiaries and any other person not affiliated with Spiegel (a "Purchaser"), relating to Spiegel's credit card businesses (i.e. Spiegel's bankcard, preferred card and First Consumers National Bank businesses). Engagement Letter dated February 20, 2002, Ex. "A," of J.P. Morgan's Response. The event or events that would trigger a possible transaction and entitlement to compensation are specifically defined in the Engagement Letter.
By the Spring of 2002, the Comptroller of the Currency of the United States of America, concluded an investigation into the affairs of First Consumers National Bank. Consent Order, Ex. "A," of Debtors' Reply. On May 14, 2002, the Comptroller executed a stipulation and consent order (the "Consent Decree") obligating Spiegel Inc.'s subsidiary, First Consumers National Bank to "cease and desist any and all transactions with any and all affiliates, (with limited exceptions)." Debtors' Reply at 2, Ex. "A" of Debtors' Reply; Tr. at 8:7-24. Essentially, the Consent Decree mandated that the Bank be sold, merged or liquidated. Debtors' Reply at 6. Since the Bank was rendered a non-entity, it chose liquidation in lieu of a sale. Debtors' Reply, ¶ 13 at 7. Liquidation appeared to be the most practical choice given the fact that upon execution of the Consent Decree: (1) the Bank could no longer securitize its credit card receivables resulting in a loss in liquidity for Spiegel, and (2) the Merchant companies were not getting reimbursed for credit card sales, so they stopped honoring the credit cards. Tr. at 8:14-25; 9:2-5. By the Spring of 2003, Spiegel decided to enter into an agreement with an entity known as World Financial Network National Bank ("World Financial") to replace First Consumers National Bank and administer new private label credit cards for use at the Merchant Companies. Debtors' Reply at 3; J.P. Morgan Response, ¶ 6 at 2; Tr. at 9:6-10.
On March 17, 2003 (the "Petition Date"), Spiegel, Inc. and its affiliates filed a voluntary petition for relief under chapter 11 of Title 11 of the United States Code, (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York. Presently, the Debtors manage and operate their businesses as debtors and debtors-in-possession pursuant to 11 U.S.C. §§ 1107 and 1108. On March 18, 2003, this Court entered an order authorizing the Debtors to reject the private label credit card agreements with the Bank. Debtors' Reply, ¶ 15 at 7. On March 24, 2003, the United States Trustee appointed an Official Committee of Unsecured Creditors (the "Creditors Committee"). On May 29, 2003, this Court issued an order approving the liquidation plan for the Bank, and appointed a liquidating agent. On July 15, 2003, this Court entered an order establishing October 1, 2003 as the bar date for filing proofs of claim against the Debtors. On September 15, 2003, this Court entered an order approving the May 2003 private label credit card agreements between World Financial and the Debtors. Debtors' Reply ¶ 17 at 8.
On September 23, 2003, the Claimant filed a proof of claim in the amount of $3,528,995.26, (representing $3,500,000 for services allegedly performed on behalf of Spiegel, Inc. under the Engagement Letter and $28,995.26 for expenses incurred in connection with such services). Proof of Claim, Ex. "A" of the Debtors' Objection; J.P. Morgan Response dated October 12, 2004 at 1.
The parties do not dispute the fact that: (1) they entered into an Engagement Letter on February 20, 2002; and (2) J.P. Morgan received $500,000.00 from Spiegel in engagement and retainer fees at the signing of the Engagement Letter. Response of J.P. Morgan, ¶ 7 at 3; Debtors' Reply, ¶ 11 at 6. The principal issue in dispute is whether J.P. Morgan rendered any services to Spiegel, Inc. that would give rise to payment of a "Transaction Fee" as that term is defined in the Engagement Letter.
Discussion
A. Debtors' Objection to Claim number 2192 of J.P. Morgan Securities Inc.
The Debtors argue that JP Morgan is not entitled to a Transaction fee because: (1) J.P. Morgan failed to "complete a transaction" as contemplated by the Engagement Letter; (2) J.P. Morgan failed to "consummate a sale" of the credit card businesses; (3) the World Financial agreements "were not sale agreements" as contemplated under the Engagement Letter; (4) the "operating agreements" between the Debtors and World Financial did not involve a sale of a material portion of the Debtors assets as contemplated by term "Operating Agreements" under the Engagement Letter; and (5) J.P. Morgan has not met its burden of showing that its claim is valid under section 502 of the Bankruptcy Code. Debtors' Objection at 2; Debtors' Reply ¶¶ 18-31 at 8-15; Tr. at 9-10. Counsel argues that the Engagement Letter requires "an acquisition by a purchaser of a material portion of the assets whether directly or indirectly through a series of transactions . . . [but here], no consideration was paid, [and] no assets were transferred from World Financial." Tr. at 32:10-21.
B. Response of J.P. Morgan Securities, Inc. to the Debtors' Objection to Claim number 2192
J.P. Morgan maintains that: (1) it was retained to assist the Debtors in finding a purchaser for some or all of the credit card businesses, including any person who would agree to originate credit card assets for Spiegel; (2) its services were fully rendered, it presented a candidate and presented terms; (3) the Engagement Letter provided that any, of at least four different kinds of corporate transaction, could qualify as a Transaction, including an agreement with respect to the future origination of credit card receivables; (4) it would have earned a Transaction Fee if a transaction were to have closed with a purchaser during the period beginning November 1, 2001 and ending eighteen months after the termination of the Engagement Letter; and (5) the sale of Assets was not a pre-requisite to a transaction. J.P. Morgan Response at 1; Supplemental Opposition of J.P. Morgan at 7-14; Tr. 27:12-14; Tr. at 34: 22-25; 35:2-4. Counsel adds that "it performed extensive due diligence and approached a number of potential purchasers, including World Financial and participated in negotiations with the Debtors and World Financial." J.P. Morgan Response at 2.
In its post-hearing submissions, counsel for the claimant requests that this Court grant an evidentiary hearing. Counsel argues that there is no dispute that the claimant filed a valid proof of claim for its Transaction Fee, but the question of whether it is entitled to the fee requires discovery and a trial to determine the parties "intent" and to further explore the factual issues embodied in affidavit testimony.
C. The JP Morgan/Spiegel Letter of Engagement
The Engagement Letter provides as follows:
For the purposes hereof, the term "Transaction" shall mean, whether in one or a series of transactions,
(a) any merger, consolidation, material joint venture, or other business combination pursuant to which the business of the Business is combined with that of a Purchaser;
(b) the acquisition, directly or indirectly, by a Purchaser by way of negotiated purchase or any other means of a material portion of the capital stock of the Business; and
(c) the acquisition by a Purchaser, directly or indirectly, of a material portion of the assets, properties and/or businesses of the Business by way of a direct or indirect purchase, lease, license, exchange, joint venture, or other means including, but not limited to, any agreement between the Company and a Purchaser with respect to the future origination of credit card assets (any such agreement, an "Operating Agreement") and
(d) any spin-off or other extraordinary dividend of cash, securities, or other assets of the Business to shareholders of the Company. Engagement Letter at 1.
Analysis
Objections to claims are fact sensitive. Here, the parties rely primarily on the language of the contract, rather than case law to substantiate their arguments. While it is not the Court's role to interpret or reform contracts, this Court is required to consider the language of the contract as it relates to the obligations of the parties that arise thereunder.
Reducing the Engagement Letter to its essential terms, the Court is able to determine what constitutes a transaction giving rise to a Transaction Fee. A transaction arises if one of the following occurs: (a) a merger, consolidation, material joint venture or other business combination; (b) an acquisition of a material portion of the capital stock of the business; (c) an acquisition of a material portion of the assets, properties and/or businesses of the Business by purchase, lease, license, exchange, joint venture, or agreement between a Purchaser and the Company, with respect to the future origination of credit card assets (any such agreement, an "Operating Agreement"); or (d) a spin-off or split-off. This Court finds that all four definitions of possible transactions require some type of sale, even the highly contested language under item "c" contemplates a sale. If the "Operating Agreement" mentioned in item "c" were to be considered "outside of the scope of an acquisition or sale," it could have been delineated as a separate line item. This Court finds that item "c" of the definition of "transaction" should be read in its entirety. Therefore, this Court finds that there are four possible types of sales transactions, which if consummated, would give rise to the payment of a "Transaction Fee."
This Court finds the Claimant has failed to meet its burden with respect to its claim against the Debtors. J.P. Morgan was retained as a financial advisor to help consummate a sale, however, since its actions did not conform to the definition of aiding a "transaction," (as defined by the Engagement Letter) J.P. Morgan is not entitled to a Transaction Fee.
Conclusion
Accordingly, the Debtors' motion objecting to claim number 2192 of J.P. Morgan is GRANTED. The Debtors will settle and order on five (5) business days notice consistent with this opinion.