IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re:
UNITED ROAD TOWING INC., et al.,
Debtors.
1Chapter 11
Case No. 17-10249 (LSS)
(Jointly Administered)
Hearing Date & Time: April 12, 2017 at
1:30 p.m. (prevailing Eastern Time)
Objection Deadline: April 5, 2017 at
4:00 p.m. (prevailing Eastern Time)
LIMITED OBJECTION AND RESERVATION OF RIGHTS OF CAPITOL
INDEMNITY COMPANY AND PLATTE RIVER INSURANCE COMPANY TO AND
REGARDING DEBTORS’ SALE MOTION AND NOTICE OF ASSUMPTION,
ASSIGNMENT AND CURE AMOUNT WITH RESPECT TO EXECUTORY
CONTRACTS AND UNEXPIRED LEASES
TO THE HONORABLE LAURIE SELBER SILVERSTEIN,
UNITED STATES BANKRUPTCY JUDGE:
Capitol Indemnity Company and Platte River Insurance Company (together, “Platte” or
the “Surety”), by and through their undersigned attorneys, file this limited objection and
reservation of rights (the “Objection”) to and regarding (a) the Motion for Entry of (A) Order (I)
Scheduling a Hearing to Consider Approval of the Sale or Sales of Substantially All of the
Debtors’ Assets, and the Assumption and Assignment of Certain Executory Contracts and
Unexpired Leases, (II) Approving Certain Bidding Procedures, Assumption and Assignment
1
The Debtors in these cases, along with the last four digits of each Debtor’s federal tax identification number, are: United Road Towing, Inc. (6962); URT Holdings, Inc. (8341); City Towing, Inc. (2118); URS West, Inc. (3518); Bill & Wag’s Towing (3518); Export Enterprises of Massachusetts, Inc. (5689); Pat’s Towing, Inc. (6964); Keystone Towing, Inc. (6356); Ross Baker Towing, Inc. (9742); URT Texas, Inc. (3716); Mart Caudle Corporation (1912); Signature Towing, Inc. (3054); WHW Transport, Inc. (3055); URS Southeast, Inc. (7289); URS Northeast, Inc. (7290); URS Southwest, Inc. (7284); Fast Towing, Inc. (5898); E&R Towing and Garage, Inc. (8500); Sunrise Towing, Inc. (7160); Ken Lehman Enterprises, Inc. (1970); United Road Towing of South Florida, Inc. (9186); Rapid Recovery Incorporated (1659); United Road Towing Services, Inc. (2206); Arri Brothers, Inc. (7962); Rancho Del Oro Companies, Inc. (3924); CSCBD, Inc. (2448); URS Leasing, Inc. (9072); UR VMS LLC (4904); UR Vehicle Management Solutions, Inc. (0402). The Debtors’ mailing address is c/o United Road Towing, Inc., 9550 Bormet Drive., Suite 301, Mokena, Illinois 60448.
Procedures, and the Form and Manner of Notice Thereof, and (III) Granting Related Relief; and
(B) One or More Orders (I) Approving the Sales or Other Acquisition Transactions for the
Properties, (II) Authorizing The Sales Free and Clear of all Encumbrances, (III) Authorizing the
Assumption and Assignment of Certain Executory Contracts and Unexpired Leases, and (IV)
Granting Related Relief
[ECF No. 57] (the “Sale Motion”), and (b) the Notice of Assumption,
Assignment and Cure Amount with Respect to Executory Contracts and Unexpired Leases of the
Debtors
[ECF No. 216] (the “Notice”), filed by United Road Towing, Inc. (“URT”) and its
debtor affiliates (collectively, with URT, the “Debtors”). In support of the Objection, Platte
respectfully states as follows:
PRELIMINARY STATEMENT
1.
In the ordinary course of their businesses and operations, the Debtors are required
to provide third parties with surety bonds to guarantee Debtors’ payment and performance of
certain contracts and obligations as well as to satisfy certain license and permit requirements of
the states and municipalities where Debtors operate. The Debtors cannot lawfully operate
without the surety bonds issued by Platte (or sufficient replacement bonding issued by another
surety company).
2.
Pre-petition, Platte issued twenty-three (23) separate surety bonds (each a “Bond”
and collectively, the “Bonds”) at the request and on behalf of Debtors, as principals. The Bonds
are for the benefit of certain governmental obligees (each an “Obligee” and, collectively, the
“Obligees”), often governmental units and other public agencies or entities, as set forth more
particularly in the accompanying chart listing the Bonds attached as Exhibit A. The aggregate
penal sum of the Bonds is $5,059,900.00. There is no existing claim under any Bond, but Platte
may receive claims on the Bonds in the future. Platte has incurred expenses in connection with
furnishing and continuing the Bonds, which expenses are ongoing. Platte does not hold collateral
for the Bonds. Platte and certain of the Debtors are parties to a prepetition General Indemnity
Agreement (the “Indemnity Agreement”), pursuant to which Debtors agreed to indemnify
Platte in the event Platte sustains any loss and/or is required to pay or perform under any of the
Bonds it has issued. A copy of the Indemnity Agreement is attached as Exhibit B.
3.
Platte files this Objection for a number of reasons. First, the Bonds are executory,
non-assumable financial accommodations to the Debtors, as set forth in and construed under 11
U.S.C. §§ 365(c)(2) and (e)(2)(B), and, therefore, cannot be assumed and/or assigned by the
Debtors, at least not without Platte’s consent. The Bonds are a form of surety credit, which
Platte has no obligation to extend post-petition to the Debtors or to the Buyer (as defined herein)
in the form of keeping the Bonds in place. While Platte may consider leaving the Bonds in place
and/or bonding the Buyer, Platte is certainly under no obligation to do so. Second, the Notice
improperly lists a cure amount of $0 for the Bonds, notwithstanding that Platte has incurred
post-petition legal fees and expenses in the approximate amount of $29,638.50 as of March 31, 2017
and there are unpaid post-petition Bond premiums due to Platte in the amount of $36,614.00, in
connection with the Bonds (Platte also claims additional post-petition legal fees, expenses and
premiums that may come due, along with reimbursement for any claims that may be made upon,
and satisfied by, Platte under any of the Bonds prior to the final assumption and/or assignment of
any of the Bonds). Third, the Notice is unclear in its identification of the Debtors’ bonded
contracts and agreements with the Obligees that Debtors seek to assume and/or assign. Fourth,
per the Sale Motion, the Debtors seek authority to sell substantially all of their assets, yet they
have not identified a stalking horse bidder nor have the Debtors demonstrated that the winning
bidder for their assets (the “Buyer”) can provide adequate assurance of future performance of the
bonded contracts and agreements with the Obligees, thus unduly shifting all of the risk of loss to
Platte.
RELEVANT BACKGROUND
The Chapter 11 Cases
4.
On February 6, 2017 (the “Petition Date”), the Debtors each commenced with
this Court a voluntary case under chapter 11 of title 11 of the United States Code (the
“Bankruptcy Code”). The Debtors are operating their businesses as debtors-in-possession,
pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. No trustee or examiner has been
appointed in the Debtors’ cases.
5.
The Debtors’ chapter 11 cases are being jointly administered for procedural
purposes only pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy Procedure (the
“Bankruptcy Rules”). On February 16, 2017, the Acting United States Trustee for Region 3
appointed the statutory committee of unsecured creditors pursuant to section 1102 of the
Bankruptcy Code. [ECF No. 78].
6.
On the Petition Date, the Debtors’ filed a motion for an order to maintain and
continue their surety bond program. On February 7, 2017, the Court entered an Interim Order (I)
Authorizing the Debtors to Continue their Surety Bond Program and Pay All Obligations In
Respect Thereof, (II) Authorizing Applicable Banks and Other Financial Institutions to Honor
and Process Related Checks and Transfers, and (III) Granting Related Relief
[ECF No. 35]. On
March 23, 2017, the Court entered a Final Order with respect to the Debtors’ surety bond
program. [ECF No. 219] (the “Final Bonding Order”).
The Bonds and Indemnity Agreement
7.
In connection with Platte’s issuance of the Bonds, prior to the Petition Date, Platte
entered into the Indemnity Agreement, dated March 12, 2009 with URT Holdings, Inc., Export
Enterprises of Massachusetts, Inc., and United Road Towing, Inc. and their present or future
affiliates or subsidiaries. (See Exhibit “B” attached hereto).
8.
Pursuant to the Indemnity Agreement, the Debtors agreed, jointly and severally,
to indemnify and exonerate Platte from and against any and all loss and expense of whatever
kind, including interest, court costs and counsel fees, which it may incur or sustain as a result or
in connection with (a) the furnishing of any Bond, or (b) the enforcement of the Indemnity
Agreement.
29.
Platte has not received a claim from any Obligee, but Platte may receive claims
on the Bonds in the future. Platte has incurred legal fees and expenses in connection with
furnishing and continuing the Bonds, which fees and expenses are ongoing. Platte does not hold
collateral for the Bonds or Indemnity Agreements.
10.
As of the date of this Objection, Platte has not asserted any claims against the
Debtors under the Indemnity Agreements, but reserves all rights to do so.
The Sale Motion, Notice, and Cure Amounts
11.
On February 10, 2017, the Debtors filed the Sale Motion [ECF No. 57]. Pursuant
to the Sale Motion, the Debtors seek the authority to, among other things, (a) sell substantially all
of their assets (the “Sale”) free and clear of all liens and encumbrances to a stalking-horse
purchaser or other Buyer pursuant to an asset purchase agreement; and (b) assume and assign to
the Buyer certain of its executory contracts.
12.
On March 6, 2017 the Court entered an Order granting the Sale Motion and
scheduled a sale hearing for April 12, 2017. On March 9, 2017 the Court entered an Amended
Order establishing a sale objection deadline of April 5, 2017 [ECF No. 153] (the “Sale Order”).
2
Under the Indemnity Agreement, the Debtors further agreed to deposit with Platte on demand the amount of any reserve against such loss which Platte is required or deems it prudent to establish, whether on account of an actual liability or one which is, or may be, asserted against it, and whether or not any payment for such loss has been made.
13.
Under the Sale Order, the date by which the Debtors were to designate a stalking
horse bidder or bidders was March 31, 2017. As of the date of this Objection, the Debtors have
not identified a stalking horse bidder or bidders for their assets. A sale is scheduled for April 10,
2017.
14.
Also on March 6, 2017, the Court entered an order [Docket No. 131] inter alia,
approving certain bidding procedures, assumption and assignment procedures, and the form and
manner of notice thereof.
15.
On March 22, 2017, the Debtors filed the Notice [ECF No. 216]. Exhibit “A” to
the Notice lists various executory contracts that the Debtors seek to assume and assign in
connection with the Sale. Exhibit “A” to the Notice also proposes a cure amount for each
contract designated for assumption and assignment.
16.
Exhibit “A” to the Notice lists: (i) Platte’s 23 Bonds, generically, on page 6 with a
proposed cure amount of $0; and (ii) various bonded contracts with the Obligees (e.g.,
Massachusettes Department of Transportation, City of Minneapolis, City of San Antonio, State
of Nevada), each designated as a “Contract Counterparty” with a proposed cure amount of $0.
However, it is impossible to determine from the Notice which of the contracts bonded by Platte
are included because the “Description” of each contract is vague as it omits the precise contract
name, date, or other identifying information.
17.
Prior to filing this Objection, counsel for Platte reached out to Debtors’ counsel a
number of times to obtain additional information and more detailed descriptions, in an attempt to
verify which of the bonded contracts are designated for assumption and assignment, but Debtors’
counsel has not provided this information.
LIMITED OBJECTION
I.
As Financial Accommodations, the Bonds May not be Assumed by the Debtors
Without Platte’s Consent.
18.
The Bonds are at once executory and non-assumable “financial accommodations”
through which surety credit was provided pre-petition by Platte to the pre-petition Debtor
entities. Platte did not, however, bond the Debtors-in-Possession or the Buyer. Under sections
365(c)(2) and (e)(2)(B) of the Bankruptcy Code, Platte has no obligation, and cannot be
compelled, to maintain the Bonds post-petition for the benefit of the Debtors or the Buyer.
19.
Section 365(c)(2) of the Bankruptcy Code provides that a trustee or
debtor-in-possession may not assume an executory contract to extend “financial accommodations.” That
section provides that a debtor “may not assume or assign any executory contract … of the
debtor…if…(2) such contract is a contract to make a loan, or extend other debt financing or
financial accommodations, to or for the benefit of the debtor….” See 11 U.S.C. § 365(c).
20.
This “financial accommodations” exception to section 365 codifies the policy
against compelling a party to extend new credit to a debtor. Greenwich Insurance Co. v.
Greenwich Street Capitol Partners II, L.P. (In re Metro Affiliates), 2008 WL 656788 at *6
(Bankr. S.D.N.Y. 2008)(“[i]t is clear that Code § 365(c)(2) is intended to prevent a debtor in
possession from assuming or assigning contracts that would require … financial
accommodations to be made in the future, i.e., post-filing date.”).
21.
Although the term “financial accommodation” is not defined in the Bankruptcy
Code, many courts have held that surety bonds are financial accommodations, which cannot be
assumed or assigned. See, e.g., In re Edwards Mobile Home Sales, Inc., 119 B.R. 857, 859
(Bankr. N.D. Fla. 1990) (a surety bond issued to a debtor, as prerequisite for the debtor obtaining
a state license, was a non-assumable financial accommodation because the bond evidenced the
surety’s obligation to pay the debt of the principal-debtor); In re Wegner Farms Co. Inc., 49 B.R.
440, 444 (Bankr. N.D. Iowa 1985)(a debtor's grain dealer's surety bond was a “financial
accommodation” within meaning of Bankruptcy Code sections 365(c) and 365(e)(2)(B)); In re
Adana Mortgage Bankers, Inc., 12 B.R. 977, 987 (Bankr. N.D. Ga. 1980)(“[t]he obligation to
pay money on the obligation of another is a financial accommodation” within the meaning of
section 365(c) and (e)).
22.
In understanding a surety bond as a financial accommodation it is important to
note that a surety bond is not an insurance policy; rather, it is a form of guarantee. A bond is
issued to guarantee certain obligations of a principal to another party. See Restatement (First) of
Security § 82 (1941) (explaining a suretyship obligation is commonly understood to be an
extension of credit through an agreement to stand for the debt of another). Obligations of a surety
under the bond run to the obligee, up to the penal sum of the bond and subject to the terms of the
bond, indemnity agreement and/or any applicable statutory requirements. Under a surety
contract, simply paying a surety bond premium does not end the involvement of a principal.
Instead, a principal always remains liable to repay any losses which the Surety sustains.
Restatement (Third) of Suretyship and Guaranty §§ 1, 18 cmt. “A” (1995). Under a common
liability insurance policy, however, payment in full of a premium ends the involvement and
obligation of the insured. Unlike an insurance policy, if a surety incurs a loss on a surety bond, it
is always entitled to recover the full amount of that loss from the principal.
23.
In the instant case, the Bonds are financial accommodations for the Debtors. The
Bonds are agreements under which Platte agreed to extend surety credit to the pre-petition
Debtor entities and in favor of the Obligees. Specifically, the Bonds guarantee the Debtors’
primary payment, performance, license and permit obligations to various governmental units and
public agencies in the states and municipalities where Debtors operate. Platte is the Debtors’
secondary obligor and is entitled, under the Indemnity Agreement, to recover from the Debtors
all losses Platte incurs or sustains under the Bonds. The Bonds, Indemnity Agreement and
applicable non-bankruptcy law govern the parties’ relationships. It is well-settled that the
Bankruptcy Code does not create substantive contract rights in favor of a debtor that are greater
than its rights outside of bankruptcy. See e.g., In re Lucre, Inc., 339 B.R. 648, 658 & fn.11
(Bankr. W.D. Mich. 2006)(“[t]he mere commencement of a bankruptcy case and the attendant
imposition of the automatic stay did not by themselves empower the debtor, as
debtor-in-possession, to compel, from the other party to an executory contract, performance that the debtor
had no right to compel prepetition.”); In re Sturgis Iron & Metal Co., Inc., 420 B.R. 716 (Bankr.
W.D. Mich. 2009)(same). Moreover, the Bankruptcy Code cannot compel a party extending
credit to a debtor prepetition to continue to extend that credit post-petition either to the
Debtors-in-Possession or to the purchaser of the assets of the Debtors-Debtors-in-Possession. Platte never agreed
to bond the Debtors-in-Possession or the Buyer.
24.
Simply stated, the Bonds are financial accommodations that may not be assumed
by the Debtors as contemplated by the Notice, at least not without Platte’s consent. Platte does
not consent to Debtors’ proposed assumption of the Bonds at this time.
II.
Debtors Do Not Propose to Cure the Amount Due under the Bonds and Cannot
Provide Adequate Assurances of Future Performance under the Bonds.
25.
Section 365(b)(1) of the Bankruptcy Code provides, in relevant part, that if there
has been a default under an executory contract or unexpired lease of a debtor-in-possession and
the possession wants to assume and assign the contract or lease, the
debtor-in-possession must (A) cure the default, or provide adequate assurance that it will promptly cure the
default; (B) compensate, or provide adequate assurance that it will properly compensate, the
non-debtor party to the contract or lease for any actual pecuniary loss resulting from non-debtor’s default;
and (C) provide adequate assurance of future performance under the contract or lease. 11 U.S.C.
§ 365(b)(1)(A), (B), (C); see also In re DBSI, Inc., 405 B.R. 698, 704 (Bankr. D. Del. 2009).
26.
In this case, the Debtors do not propose to cure the amount currently due under
the Bonds. The Notice improperly lists a cure amount of $0 for the Bonds, notwithstanding that
Platte has incurred post-petition legal fees and expenses in the approximate amount of
$29,638.50 as of March 31, 2017 and there are unpaid post-petition Bond premiums due to Platte
in the amount of $36,614.00, in connection with Platte’s maintenance of the Bonds post-petition.
Further, the Debtors cannot provide adequate assurance of future performance because Debtors
have not identified a Buyer for their assets, including the underlying bonded contracts with the
Obligees that the Debtors seek to assume and assign in connection with the imminent sale
scheduled for April 10, 2017.
3Even if the Debtors propose to cure the amount due under the
Bonds and provide adequate assurance of future performance, the Bonds cannot be assumed and
assigned by the Debtors without Platte’s consent as a matter of law, as set forth above.
RESERVATION OF RIGHTS
27.
Platte reserves its rights, in its absolute and sole discretion, subject to the terms of
the Final Bonding Order, to: (i) renew or non-renew any of the Bonds under the terms thereof;
(ii) seek allowance of administrative expense claims for any and all losses under the Bonds
and/or Indemnity Agreement; (iii) draw on any collateral to be posted by Debtors for the benefit
of Platte for any loss and expense, including reasonable attorneys’ fees, incurred by Platte, as a
secured creditor, by reason of having executed the Bonds; (iv) cancel or terminate any of the
Bonds under applicable non-bankruptcy law or seek relief from the automatic stay to do so; (v)
require the Debtors and/or any Buyer to undergo underwriting for the Bonds, execute appropriate
3
The deadline to object to adequate assurance of future performance with respect to proposed assignees is April 11, 2017 and Platte reserves all rights with respect thereto.
